A beginner’s guide to bitcoin: what is bitcoin?

How do you get money? You can earn it by working or trading. You can buy it – someone could buy sterling using their dollars or euros, or vice versa. And if you happen to be the government, you can get money by printing it or issuing bonds.

Bitcoin is not so different. There are three ways to get hold of it: you can earn it, you can buy it, or you can mine it.

Forget mining for now. The days when you could mine it using an ordinary home computer are gone. Unless you have access to cheap energy (in which case please share the source with the rest of us) or considerable computing power, I would forget mining for the time being.

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Next we come to earning it, which is simple. All you need is a wallet. As long as the buyer of whatever product or service you are selling is happy to pay you in bitcoin, you just send them your wallet address on your invoice, instead of your bank details, and they can pay you in bitcoin, just as they would any other form of money.

There are countless wallet providers. Keys.casa and Muun (because it works on bitcoin and the lightning network) are easy places to start. Another easy place to get your first wallet is blockchain.com (you can also buy and sell bitcoin here).

But make sure you set up two-factor authentication (2FA) if you use the online versions. If you don’t protect your wallet, you risk someone stealing it. There is also the option for 3FA – where you can only get into the site with a password, and then confirmation via email and mobile phone.

However, a wallet with Blockchain is not a long-term storage solution. I stress: it is just a starting point. More on storage solutions later. Here, we focus on how to buy bitcoin.

The UK regulator, the Financial Conduct Authority (FCA), has, in its wisdom, made life very difficult for the UK investor who is interested in cryptocurrencies. It has banned the sale of crypto derivatives and exchange traded notes (ETNs) to retail investors with the result that investors lose the comparative safety these products provided (note that I say “comparative” safety – I’m not implying that spreadbets on crypto are “safe”).

If retail investors want to invest in cryptocurrencies – and you should, it is the future of finance – you are now forced to take technological risk as well as the risk of the actual investment itself.

However, our focus here is not to moan about the FCA, but to tell you about how to buy bitcoin, and my next dollop of advice is this: before putting any significant sums to work, research as much as you can. Read about bitcoin. Listen to podcasts. And, above all, try out the tech.

The best exchanges to use to buy bitcoin

There are so many exchanges now, and they all have their pros, cons and idiosyncrasies. The best for UK investors are probably any of Gemini, Kraken, Bitfinex, CEX.Io, Bitstamp, SFOX, Crypto.com, Poloniex, Bittrex and eToro. Opening an account is a bit tiresome with all the ID checks – generally, the more you want to buy, the more paperwork you have to fill in. And do make sure you set up 2 or 3FA, although most exchanges insist on it.

Bitstamp, Kraken and Bitfinex seem to have the cheapest commissions. But try and buy through the trading apps, not off the front page. Commission rates are lower there for some reason.

Once you’re set up, you’ll experience the delights of sending money to your exchange via a bank. You might end up having to make a phone call to the bank at this point (and you’ll wait a while; banks’ response times have become very slow in this new Covid era). Gemini, being FCA registered, was probably the easiest in this regard. I had untold problems sending money to Bitstamp – HSBC refused to allow me to send money there.

Easier options for small amounts include Bittylicious and LocalBitcoins, or even bitcoin ATMs (but both their commissions and spreads are vast).

Revolut makes it easy to buy bitcoin (and easy to open an account). But you can’t then move your bitcoins elsewhere. You can only sell back to Revolut, which is somewhat besides the point. But it also means Revolut solves the storage problem for you.

Advanced users and purists will prefer the decentralised exchanges, but we will leave those for another day.

Other ways to buy bitcoin

If you’d still prefer some sort of listed option, then you could buy Microstrategy (Nasdaq: MSTR) which has become something of a proxy for bitcoin. London has a listed bitcoin miner, Argo Blockchain (LSE: ARB).

Perhaps easiest of all is the Vaneck Vectors Digital Assets ETF (LSE: DAGB), through which you are gaining exposure to a basket of all the listed bitcoin companies. It’s not the same as owning bitcoin, but it’s a start.

Canada has several tinycap bitcoin plays, if your broker can access the market. There is Venture-listed Neptune Digital Assets Corp (Vancouver: NDA), which is a play on the altcoin, Dash. And there’s Cypherpunk Holdings (Canada: HODL). I was a director of this company and even briefly CEO. We set up the company to invest in privacy technologies and it now has the one of the largest bitcoin treasuries of any public company, as well as some very interesting other investments in privacy technologies. Its chairman is former Lithuanian poker champion Tony Guoga, who also has a huge stake in the company. In Moe Adham and Jon Matonis it has two of the most crypto-literate directors you could find