Cryptocurrency, often called crypto, continues to be a revolutionary force in global finance, offering new ways to store, transfer, and grow wealth. As these digital currencies continue to gain popularity, they present a unique opportunity for investors (new and old) to diversify their portfolios and tap into the growth potential of a rapidly evolving market.
Let’s explore how people based in the UK can invest in crypto, including grasping cryptocurrency basics, using reputable trading platforms, adhering to UK-specific tax obligations, and building sound investment strategies.
What is Cryptocurrency?
Cryptocurrency is best described as digital money that doesn’t depend on banks or governments. Unlike regular money (fiat), crypto is powered by a secure blockchain network, which uses cryptography to protect transactions. This network also verifies ownership and controls how new coins are created. Of the 13,000+ digital currencies currently available, Bitcoin is the most popular and valuable. The remaining currencies, known as altcoins, offer unique features and uses.
Crypto Investing in the UK
Investing in crypto has become easy with its growing popularity and shift towards digital finance and decentralised finance (Defi). So, if you’re in the UK and considering making that crypto move, now is the best time. However, the entire process of getting started might seem a little complicated and risky, especially with news of crypto scams.
This is why the first step in any crypto journey involves using a Financial Conduct Authority (FCA) registered exchange platform that is user-friendly and trustworthy, like the OANDA Crypto trading platform. These platforms are safe, simplify market navigation, and provide essential information to keep you informed.
The UK’s Financial Conduct Authority (FCA) ensures that all crypto exchange institutions and platforms comply with anti-money laundering (AML) regulations. Once you’ve settled on a registered exchange, you must create and verify your account by uploading the required documents for compliance. After confirming your account:
- Deposit funds into your exchange account. Options typically include bank transfers, debit, or credit cards.
- Choose your preferred cryptocurrency. Popular options include Bitcoin (BTC), Ethereum (ETH), and a variety of “altcoins.”
- Confirm the purchase, ensuring you review the transaction fees beforehand.
Voila! You’re a crypto investor. To avoid losing access to your digital assets, remember to ensure your wallet is well-encrypted and your password is securely backed up.
5 Crypto Investment Considerations
Investing in cryptocurrency can be exciting and challenging. The market has many opportunities and complexities, so it is important to learn critical factors that can impact investment decisions. These are five pivotal factors that should serve as a guide:
Market Volatility
Cryptocurrency markets are known for extreme price swings. This volatility can create profit opportunities, but it also brings risks of significant losses. Big and small events can affect the market, such as technological advancements or just a post from an influencer on “X” social platform.
Liquidity and Accessibility
The liquidity of a cryptocurrency refers to how easily it can be bought or sold without affecting its market price. High-liquid cryptocurrencies like Bitcoin (BTC) or Ethereum (ETH) can be bought or sold immediately. Meanwhile, lesser Altcoins may be more challenging to trade. This is crucial if there are plans for significant investments.
Investment Strategy
Developing and applying a sound and disciplined strategy proven to work in investing in cryptocurrencies. The two major categories:
- Long-Term Hold (HODLing): This involves holding assets with the belief and information that the value will increase over time.
- Short-Term Trading: This involves trading assets based on market fluctuations.
Portfolio Diversification
Diversification does not nullify all risks, but it can help spread them across assets, avoiding any major setbacks. It’s not advisable to put all your funds into one cryptocurrency because this would make you vulnerable to market fluctuations. Instead, build a diversified portfolio that consists of a mix of large-volume assets like Bitcoin (BTC) or Ethereum (ETH).
Tax Implications
Cryptocurrency transactions are generally subject to taxes, which can vary based on the type of activity (buying, selling, or earning through staking or mining). In the UK, His Majesty’s Revenue and Customs (HMRC) treats crypto transactions as taxable, with capital gains tax applied to profits.
Understanding UK Crypto Tax Obligations
Investing in cryptocurrency in the UK comes with specific tax obligations that investors and individuals need to know and stay compliant with. Since cryptocurrencies are considered property or assets, not currency, every income or profit derived from them would be subject to either Capital Gains tax (CGT) or income Tax, depending on the nature of the transaction. Crypto received as income, such as through mining, staking, or earning it as payment for services, will be taxed under Income Tax.
To ensure transparency, investors must accurately report their crypto activities to HMRC (HM Revenue & Customs). If your total gains exceed the tax-free allowance, you must file a self-assessment tax return. You can use tax software to manage and report all transactions.
There are other peculiarities to cryptocurrency taxation in the UK. For instance, when transactions result in losses, they can be used to offset future gains, reducing your tax liabilities. With the evolving nature of the cryptocurrency landscape, it is essential to stay current with any changes in UK tax laws that might affect your investments — or even consult a tax professional experienced in cryptocurrency taxation to minimise.
Investing in Crypto the Smart Way for UK Residents
While cryptocurrency offers exciting investment opportunities, UK investors must understand tax obligations deeply. Whether you are earning crypto as income or making gains from trading, staying informed about Capital Gains Tax and Income Tax requirements ensures you remain compliant with HMRC regulations by carefully tracking your transactions and seeking professional advice when necessary.
