Buying Bitcoin in the UK

Today’s post is a first look at how to buy bitcoin in the UK.

The Story So Far

Interest in Bitcoin is at an all-time high, as its the BTC price itself (more than $37K as I write this).

• There has also been a lot more positive sentiment from institutional investors recently.

Last time out we looked at one of the elephants in the room – taxation.

• The short version is that you’ll need to pay 20% capital gains tax on your profits (unless these are below £12.3K pa).

That’s because the UK regulator (the FCA) recently banned the sale of crypto derivatives to retail investors.

This came into force in January 2021, removing both tax-efficient ways of gaining exposure to BTC:

1. ETFs (strictly, ETPs) within a SIPP
2. Spread-bets

Portfolio loans

Another way to theoretically access your crypto profits without paying tax on them would be to take out a loan against them.

• This is similar to the way in which brokers like IB will lend against your stock and bond portfolio.

It’s not likely that any institution you already deal with will offer such a loan against bitcoin, but according to the bulletin boards, crypto brokers like BlockFi will do it.

• I’m not clear what the interest rate on such a loan would be.
• There is also the issue of how to provide collateral without “giving away the keys” to your bitcoin, but presumably, loans are limited to a proportion of your balance with that broker (in which case you don’t have the keys in the first place).

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The big downside of such loans is the risk of a margin call if the value of your bitcoin falls:

The first margin call occurs at a 70% LTV (loan to value ratio). At this point, you have 72 hours to take action by posting additional collateral or paying down the loan balance.

If your LTV reaches the 80% mark, BlockFi will automatically sell a portion of your crypto collateral to bring your LTV back to a 70% LTV.

Of course, if the value of your crypto holdings increases, your LTV will fall (and you could sell some crypto to repay your loan).

It’s hard to recommend combining the current extreme volatility of crypto with leverage (other than via spread bats with guaranteed stop losses).

Professional spread betting

One potential way around the FCA ban is to become a “professional” spread bettor, or at least to open a professional spread betting account with one of the brokers.

• I can’t find a definitive ruling on whether you can open a professional account with one broker and remain an amateur with another, but equally, I can’t find any evidence that your status is centrally recorded.

Since you are allowed to change your mind and be reclassified as an amateur, this route seems worth investigating.

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According to IG:

A professional client is deemed capable of making his or her own investment decisions, and understanding the risks involved, with greater autonomy than retail clients. This means they can access favourable rates and benefits, but will waive some FCA protections afforded to retail clients.

The key upside relevant to this article is that you will be able to bet on crypto prices and potentially generate tax-free profits.

• You also gain access to lower margin requirements (higher leverage).
• Some brokers may offer additional credit lines to professional traders, and/or access to “dedicated” account managers and/or special trading tools and products.

The key downside is that you lose the negative balance protection introduced a few years ago.

• Retail investors can’t lose more money than they hold in their spread-bett8ing account, but professional investors face unlimited losses.

Brokers are also forced to use simpler terminology with retail clients, so if you go down the professional route, you might need to brush up on your understanding of the markets and instruments you are trading.

There is also a change in the execution rules. IG explains:

For retail clients we must prioritise overall prices and cost of a transaction when giving best execution. As a professional client, we may prioritise other factors in giving best execution, such as speed and likelihood of execution if we determine they are equally or more important than overall price.

Note that IG states that in practice the way they fill orders will not change.

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To qualify as a professional, you need to meet two out of three criteria:

1. Working in the financial sector for a year (in a job which requires knowledge of CFDs or spread-betting)
   • This one is binary – you either do or you don’t – if you do, you’ll also need to check whether your employer allows you to spread bet.
2. Having a portfolio of €500K or more.
   • SIPPs, ISAs and cash all count, so many people can meet this one.
   • Property and company pensions are excluded.
3. Placing 40 trades of significant size in the last year.
   • I think these are spread-bets rather than stock trades, and the value of the underlying is what counts.
   • The trades need to be £10K for stocks and £50K for other instruments.

This last hurdle is harder to pass than it seems.

• Placing 40 bets in a year would not be so unusual, but using industry-standard risk management, you would need an account size of around £50K to £60K for your average trades to be that size.

So most private investors won’t qualify in any case.

Why are you buying?

Before we get into the mechanics of how to buy bitcoin, let’s spend a moment thinking about why you want to buy.

1. The good reason is that you think that there is genuine institutional interest in crypto and that bitcoin is on a journey towards becoming a store of long-term value, like gold.
   • As such, you want to find a safe way to invest 15 to 2%of your portfolio in BTC for the medium- to long-term.
2. The bad reason is that you want to speculate on a very volatile asset after a stupendous run-up in price.
   • You have FOMO, and you believe YOLO.

I won’t be much help to the second group of would-be buyers.

• It remains to be seen if I can help the first group.

Banks

We should also talk about the attitude of UK banks to crypto.

• Outside of spread-betting and ETPs, you’ll need to convert fiat currency (£) into crypto (we’ll assume BTC) using a crypto broker as an “onramp”.

Once inside the crypto world, you can convert between coins using a crypto broker – but that initial “Investment” requires you to involve a bank account, via a debit card or a bank transfer.

Because of the fear that crypto is being used for money-laundering, the attitude of UK banks to these transactions varies.

• The Times reported January that HSBC was refusing transfers whilst Lloyds was allowing them.

New Fintech banks also seem divided, with Revolut supporting crypto and Startling and Monzo not.

• So it looks like this is a “suck it and see” situation at the moment.

Other online payment platforms – such as PayPal, which has said that it will support bitcoin balances later in 2021 – can be considered alongside the online-only banks.

Mechanics

Let’s take a look at the process of buying and storing bitcoin:

1. You open an account with a crypto broker (also known as a cryptocurrency exchange)
2. You transfer fiat money (£) into the account
3. You buy crypto with that £ balance (we’ll assume BTC)

At this point you have three options:

1. You can leave it with the broker
   • Hardcore crypto HODLrs won’t do this, as they believe in “not your keys, not your crypto”
   • Beginners may not care, especially when dealing with small balances
2. You can move it into a software wallet on your phone or PC
   • This will have public and private keys so that people can send you money and you can access your stash
3. You can move it offline into a hardware wallet (costing £50 or more to buy)
   • This comes with a “seed phrase” of many words.
   • The seed allows the wallet (or a replacement of the same type) to generate your keys (and hence access to your coins)
   • The seed phrase needs to be physically written down (not stored online) and protected (eg. against theft and fire).

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That’s it for today.

• In the next article, we’ll look at which crypto brokers and wallets are recommended on the discussion forums.

Until next time.