Should you invest in bitcoin?

Bitcoin has had a great 2023 so far. Having slumped to about $15,000 last November as crypto exchange FTX collapsed, the digital asset has staged a strong recovery. Here we look at whether bitcoin and other cryptocurrencies are a good investment.

As we reach the festive season, the original crypto is worth more than double its recent low point, at about $37,000.

Following an initial bounce early in 2023, bitcoin bounced around $26,000 for much of the year before gaining fresh momentum in October. But what what exactly is this thing that everyone is talking about and what does 2024 hold in store?

In this article, we explain:

This article contains affiliate links that can earn us revenue.*

What is bitcoin and how does it work?

Cryptocurrencies, including bitcoin, are digital assets that operate in a similar way to normal currency but with significant differences.

They use peer-to-peer payment methods, without the banks taking a cut from every transaction, although if you are using a broker or digital currency exchange they ware likely to charge for for every transaction and possibly other fees as well. There are no physical versions of the coins. 

Each bitcoin is created (or mined) using an encrypted code, which is a string of numbers and letters. The same equation used to create the code can “unlock” it (like a virtual key).

Other important points:

• Cryptocurrencies such as bitcoin are a form of payment that uses blockchain technology to send data in cyberspace
• Each bitcoin must be mined
• It is finite: only 21 million bitcoins can be mined in total
• Cryptocurrencies are “decentralised”, meaning they are not regulated by a financial authority such as a government or central banks
• Most platforms will allow bitcoin purchases using credit cards (bear in mind that your credit card provider may charge you a fee to do this or may indeed not allow it).

Why did bitcoin crash in 2022?

The price of bitcoin and several other leading cryptocurrencies followed a downward trajectory throughout 2022.

Rising inflation and interest rates are thought to have caused cryptocurrency to fall, along with many stocks and shares as investors reduced the level of risk they were taking on.

In November 2022, the price of bitcoin fell below $16,000, according to Coinbase*.

Since the start of 2023, the market has been recovering. One bitcoin is now worth around $30,000 as confidence has started to return to the market.

While it’s still a long way from the all-time high of $69,000 seen in November 2021, many crypto investors are hoping that 2023 will be kinder to them.

Confidence has also been boosted by news that large investment houses such as BlackRock and Fidelity are rumoured to be creating bitcoin exchange-traded funds (ETFs). These funds will track the price of bitcoin and be traded on the stock exchange.

Recent market turmoil has been caused in part by:

• The collapse of the cryptocurrency exchange FTX after it struggled to find a buyer to rescue it. This has had a knock-on effect on other crypto exchanges
• Uncertainty due to rising interest rates in the US and UK, causing a sell-off in risky assets
• A cost of living crisis caused by high inflation means that investors have less disposable income to spend on buying bitcoin and other cryptocurrencies
• China making cryptocurrency transactions illegal

Here we go into more detail about the causes of the crypto crash.

Why has the price of bitcoin been going up?

This year has been reasonably good to crypto investors. The price of bitcoin increased dramatically in October to its current level of about $34,500. This marks a 30% increase in just a month, and a 109% increase since the start of the year when one bitcoin was worth approximately $16,500.

The latest spike has been attributed primarily to the looming possibility that the American regulator, the Securities and Exchange Commission (SEC), whose purpose is to enforce laws against market manipulation and protect investors, could approve a bitcoin spot ETF in the coming months. This could make cryptocurrency more accessible to investors, and possibly boost demand.

However, this year hasn’t seen the price simply rise in a linear fashion. In mid-August, the cryptocurrency market began to suffer. The price of bitcoin fell from about $30,000 to $26,000, a 13% decrease. This was due to several factors, including Elon Musk’s rocket manufacturing company SpaceX reportedly selling its bitcoin holdings, and inflationary fears.

There were a number of possible causes of bitcoin’s rally earlier this year. Inflation in the UK and US has begun to fall and this is forecast to continue throughout 2023, meaning central banks could bring down interest rates. This boosted confidence in both crypto and stock markets.

The collapse of the FTX exchange also triggered a crypto crash and many thought there was no way back for cryptocurrency. With the worst of this saga now behind investors, some may have a renewed sense of confidence.

However, there is a fear that spikes in bitcoin’s price were due to market manipulation from investors who have a particularly large amount of money invested in cryptocurrency. When these types of investors buy and sell large amounts of cryptocurrency, prices can swing significantly.

What will 2024 bring for bitcoin?

There are two major reasons for optimism. Firstly, the next “halving” is due in April 2024. This is an event which occurs approximately every four years. 

It refers to the emissions of new bitcoin paid out to the people who “mine” the network being cut in half. This increases bitcoin’s scarcity over time and therefore supports its price.

Historically, the months immediately before and after a halving have seen large rises in bitcoin’s price. There are of course no guarantees, but the precedent is clear.

The second reason is the imminent expected approval of a number of bitcoin exchange-traded funds (ETFs) by the SEC. 

Should this come to pass, it will mean traditional investing giants such as BlackRock and Fidelity will be able to directly offer bitcoin investment to their millions of clients. The firms will have to acquire bitcoin to back these ETFs, which could result in a significant increase in demand.

There will undoubtably continue to be wild swings in price both up and down and bitcoin remains a high-risk investment, but also one with tremendous potential upside.

Will bitcoin ever fully recover?

It is impossible to say whether bitcoin will recover and return to the heights we saw at the end of 2021.

The price of crypto is based purely on speculation, making it difficult to predict what the future holds for this volatile asset. In other words, bitcoin’s performance is likely to depend on how the crypto crowd is feeling.

Though past performance is not an indicator of future results, bitcoin’s previous performance might give some investors confidence of a full recovery. In 2018 bitcoin plunged by 83% before going on to reach fresh record highs in 2020 and 2021.

But there are no guarantees that bitcoin’s price will return to the levels seen in November 2021 when it reached $69,000.

Should I invest in bitcoin?

Bitcoin is extremely volatile and high risk.

If you are willing to take the risk, first make sure you understand what you are investing in, have a crypto investment strategy and have considered obtaining appropriate financial advice*. You should only invest what you can afford to lose.

There are a number of questions you can ask yourself before getting involved:

1. Do I understand what I am investing in and how bitcoin and the crypto market work?
2. Can I afford to lose all of my investment?

As with any investment, if you do buy bitcoin, make sure you aren’t putting money you need on the line.  Read more about cryptocurrency tips (and mistakes to avoid). And remember: don’t invest unless you’re prepared to lose all the money you invest. Cryptocurrency is an extremely high risk and complex investment, and you are unlikely to be protected if something goes wrong.

Should you decide to invest in cryptocurrency or in any other investment, you should always obtain appropriate financial advice* and only invest what you can afford to lose.

If you are new to investing and want to know more about the general principles and how to get started, check out our guide.

Things to consider before investing in bitcoin

Like any investment, cryptocurrency comes with risks and potential rewards. Compared to traditional types of investments, cryptocurrency is particularly risky.

Here are some things to think about before you invest:

1. Only invest a small amount of your disposable income
2. Never invest more than you can afford to lose
3. Cryptocurrencies are extremely volatile, subject to bull runs and market crashes 

Can you lose all your money in bitcoin?

Yes, you certainly can. Crypto is very risky and not like conventional investing in the stock market.

Bitcoin’s value is based purely on speculation. This is different to company stocks where the share price will generally move depending on how the business is performing.

Important: cryptocurrencies are not regulated by the UK watchdog, the Financial Conduct Authority. Crypto platforms are only regulated for anti-money laundering purposes.

There are three main ways to lose all your money with bitcoin:

• The value plummets and you sell: crypto is volatile with its price determined by sentiment. Technically you only lose money if you sell an investment for less than you bought it for. This is known as “crystallising your losses”.
• Your memory: experts estimate 20 per cent of all cryptocurrency has either been forgotten about or lost – a current value of around $140 billion, according to crypto data firm Chainalysis
• Cyber crime: hackers and scammers are thought to steal about $10 million worth of cryptocurrency every day, according to Atlas VPN

Some people choose to take their holding offline and store it in a physical device called a cold wallet, otherwise known as a hardware wallet or cold storage that is similar to a USB stick. While this protects you from online attacks, you risk losing your holdings for other reasons.

As with any investment, do your due diligence and don’t pin all your hopes on any investment generating a return.

Spread your money around so you spread the risk and only invest what you can afford to lose.

Can I make money by investing in bitcoin?

Like any investment, making money depends on what price you buy and sell an asset for. If you sell when its price is higher than you bought it for, you will make money.

If you sell for a lower price than you bought it for, you will lose money.

For example, if you had invested in bitcoin at the start of:

• 2020 and sold on 31 December 2020, you would have made a 300% profit
• 2018 and sold on 31 December 2018, you would have made a 73% loss

How to buy bitcoin

Buying the coins (or unit of a coin) on a cryptocurrency exchange such as Coinbase is the most common way of investing in bitcoin. Coinbase is a public company listed in America and it has come under scrutiny from US regulators but it remains a popular way of buying cryptocurrency in the UK.

But there are other options:

Buy shares in bitcoin-related companies

You could invest in cryptocurrency exchanges or even buy shares in companies that are accepting bitcoin as payment.

Bitcoin ETFs

You could invest in a bitcoin exchange-traded fund (ETF). This copies the price of the digital currency, allowing you to buy into the fund without actually trading bitcoin itself. (see below)

Invest in blockchain technology companies

You could invest in the blockchain network (the system for recording information about crypto). For example, tech platform Solana claims to be the fastest blockchain in the world.

Bitcoin funds

Several investment companies are launching bitcoin funds.

It will still be volatile, but it could be easier to sell your investment and get your money back than investing directly. 

There are also funds that have some exposure to bitcoin as well as traditional assets such as shares and bonds.

What is a bitcoin spot ETF?

An ETF, or exchange-traded fund, tracks the performance of a certain asset, sector, commodity or index. It can be purchased by investors on a stock exchange, just like stocks in companies. One example of an ETF is the SPDR S&P 500. This tracks the performance of the 500 largest American companies listed on US stock exchanges.

ETFs can be a popular way of investing, as they don’t require investors to necessarily pick one asset, or even own an asset. This way, risk can be spread over several investments. ETFs also lower the barrier to entry for investors.

A bitcoin spot ETF would allow investors to track bitcoin’s performance without having to actually buy and own the asset itself. If the value of bitcoin goes up, investors with money in a bitcoin spot ETF would expect to see the value of their investment increase in tandem.

BlackRock, the American investment firm, registered an application for a bitcoin spot ETF in June. However, there is no guarantee that the SEC will approve it. Cryptocurrency’s notorious instability and volatility means it isn’t the best candidate for an underlying asset for an ETF.

Read more: What are ETFs and are they a good investment?

What are the fees when buying bitcoin?

If you want to buy and sell bitcoin, there are usually fees to pay, such as:

• Transaction fees
• Deposit fees
• Withdrawal fees
• Trading fees
• Escrow fees

These usually cost a few per cent of the total transaction value.

Is cryptocurrency a good investment?

Cryptocurrency may be a good investment if you are willing to accept it is a high risk gamble which could pay off, but you also have to accept that there is a strong chance you could lose all of your money.

Early investors in cryptocurrencies such as bitcoin will probably have made money. If you had spent £310 to buy one bitcoin in April 2016, six years later your investment would have been worth about £24,000.

But remember: past performance is not an indicator of future results.

Prices plunged in 2022, so if you are planning to invest in crypto, it’s important to go into it with your eyes open.

Cryptocurrency is an extremely high risk investment, so don’t invest unless you’re prepared to lose all the money. You are unlikely to be protected if something goes wrong.

What are the risks of investing in cryptocurrency?

Governments and financial regulators in almost every country have warned investors of the risks posed by buying cryptocurrency.

That the warnings have been so emphatic and widespread is partly down to the hype around digital currencies.

When an investment makes headlines for high returns, is featured in advertisements or endorsed by celebrities as a way to get rich, investors can pile in without thinking through the possible consequences.

1. Volatility

Extreme volatility is a defining factor of cryptocurrency. While you may make high returns, you could also lose everything.

2. Scams

In November 2021, around £1 million–worth of cryptocurrency scams were being reported to Santander UK by its customers each month. The scale of crypto fraud overall will be much greater.

One of the most common types is when a criminal hacks into your computer and freezes you out of your account.

3. Exaggerated promises of high returns

Cryptocurrency firms may also be overstating how much investors could receive from investing in crypto, while minimising the risks.

4. No compensation scheme

In the UK, deposits held with a regulated bank or building society are protected by the Financial Services Compensation Scheme. So if, say, a bank or building society goes bust, compensation of up to £85,000 will be available to customers through the FSCS.

Crypto assets, however, are not regulated by the Financial Conduct Authority, the regulator, (FCA) and so if the cryptocurrency exchange or platform where you have invested goes bust, it is unlikely that you will get your money back.

For those wanting to get to grips with crypto investing, check out our article: Six cryptocurrency tips (and five mistakes to avoid).

Is there a “less” risky way of investing in crypto?

There are also some funds and investment trusts that have exposure to cryptocurrencies, which can be a less risky way of investing rather than buying the currencies themselves.

You could also buy shares in the companies associated with bitcoin.

“Stablecoins” could be a less risky way of investing in cryptocurrency, according to Gavin Brown, associate professor in financial technology at the University of Liverpool.

However, the “stablecoin” TerraUSD did lose its dollar peg (a third of its value) in October 2022 resulting in unprecedented losses for investors and the shockwaves hit the rest of the crypto market.

Do I need to pay tax on bitcoin?

Almost one in ten British adults own a crypto asset, according to figures from HMRC.

But HMRC found that six in ten cryptocurrency investors weren’t aware of the tax implications concerning the cryptocurrency.

When you sell a large amount of cryptocurrency you could be liable to pay capital gains tax (CGT). If your profits exceed the CGT threshold of £12,300 in a single tax year then you could be liable.

We go into this in more detail on the rates and exemptions in our guide on capital gains tax.

You also have to be wary of CGT when it comes to traditional investments such as shares. Putting your investments inside a wrapper such as an ISA or a pension could protect you from tax.

Do financial institutions support bitcoin?

Governments, regulators and companies are looking closely at bitcoin and other cryptocurrencies.

The Bank of England has been exploring the possibility of its own central bank-backed digital currencies. This has been dubbed “britcoin”. Other central banks such as the Federal Reserve have been doing the same.

On June 23, the world’s biggest asset manager BlackRock revealed plans to launch a bitcoin exchange-traded fund (ETF). This is a fund that can be bought on the stock exchange and will track the price of bitcoin.

Another large investment firm, Fidelity, is also rumoured to be planning the launch of a bitcoin ETF.

As more institutional investors get on board with crypto assets for capital gains, this could help to calm dramatic price moves.

Why are regulators concerned about crypto?

The FCA has warned investors to be wary about companies that promise high returns from cryptocurrency. The nature of investment means that there is never a guarantee of making money and there’s always a risk of losing your capital.

In January 2021 the FCA banned the sale of complex derivatives that speculate on cryptocurrency movements. This means that financial services can’t offer retail customers contracts for difference, spreadbet options, futures and exchange-traded notes that focus on digital currencies. 

What do the FCA changes mean for investors?

The FCA has brought in new rules for companies that sell cryptocurrencies to UK investors. As part of the package of rules, crypto companies must offer investors a 24-hour “cooling-off period” when they buy bitcoin or other cryptocurrencies.

Investors now have to wait a full day before their transaction is completed. This is designed to effectively slow down the buying process and stop people from making hasty decisions about crypto.

Companies that promote crypto also have to make sure there are clear risk warnings in place and ensure adverts are “clear, fair and not misleading”.  The FCA has also banned “refer a friend” bonuses.  

The new rules came into force on October 8. If companies fail to comply then their bosses could face two years in prison, be fined, or both.

What is Binance and can I still use it in the UK?

The UK financial watchdog has blacklisted cryptocurrency exchange Binance and banned it from carrying out any UK-regulated activity over concerns about its money laundering controls.

The regulator has also ordered the company to stop any form of advertising in the UK.

Binance isn’t based in the UK, so the British regulator doesn’t have the power to stop crypto investors from buying and selling cryptocurrency using the exchange.

However, exchanges do have to register with the FCA to operate in the UK and are monitored for money-laundering.

This is a clear warning that investors should be very cautious about using the Binance exchange.

China’s crypto ban

Trading cryptocurrency in China has been illegal since 2019 in what Beijing said was an attempt to stop money-laundering. However, people can still trade online on foreign exchanges.

At the end of September 2021, China’s central bank went a step further by banning bitcoin transactions and effectively making cryptocurrency illegal.

The central bank warned that cryptocurrency “seriously endangers the safety of people’s assets”, which knocked thousands of dollars off the price of bitcoin.

Banks and payment firms in China are banned from providing cryptocurrency transaction services. In May 2021, three state-backed organisations announced there would be no protection for consumers if they lost any money from crypto trading.

The following month, banks and payment platforms were told to stop facilitating transactions while bans were issued on crypto mining.

“Given the huge volatility and that the use case of crypto currencies is far from proven, traders should only dabble with money they can afford to lose.’’

Susannah Streeter
Senior Investment and Markets Analyst, Hargreaves Lansdown

*All products, brands or properties mentioned in this article are selected by our writers and editors based on first-hand experience or customer feedback, and are of a standard that we believe our readers expect. This article contains links from which we can earn revenue. This revenue helps us to support the content of this website and to continue to invest in our award-winning journalism. For more, see How we make our money and our Editorial promise.