Bismuth oxyhalide (BiOX, X = Cl, Br, I) nanomaterials have attracted enormous attention because their unique layered structure and nano‐size effect endows them with fascinating physicochemical properties and wide application potential. However, synthesis of ultrasmall BiOX nanocrystals with sizes down to sub‐10 nm remains a considerable challenge and the investigation of such ultrasmall BiOX nanocrystals in alkali‐metal ion batteries have not yet been explored so far. The fabrication of ultrasmall BiOX nanocrystals with an average size of 6 nm on reduced graphene oxide by a versatile nanoconfinement strategy is reported here. The obtained ultrasmall BiOCl nanocrystals‐based monolithic composites are evaluated as free‐standing anodes for potassium‐ion batteries (PIBs) and exhibit the highest reversible capacity of 521 mAh g−1 at 0.05 A g−1 among all reported Bi‐based PIB anodes and ultrahigh volumetric capacity of 1148 mAh cm‐3, along with excellent rate capability (205 mAh g−1 at 5 A g−1 ) and extraordinary cycling stability with 94.7% capacity retention after 3000 cycles. More importantly, a fully reversible potassium storage mechanism of BiOCl (BiOCl ↔ Bi ↔ K3Bi) induced by the ultrasmall nano‐size effect is revealed for the first time by detailed characterizations, providing new fundamental insights for boosting the electrochemical performance of nanostructured materials. A general nanoconfinement strategy is demonstrated to fabricate ultrasmall bismuth oxyhalide nanocrystals. Endowed by the ultrasmall nanosize effect, the sub‐10 nm bismuth oxychloride nanocrystal deliver the highest potassium‐ion storage capacity reported among all bismuth‐based materials and achieve fully reversible potassium‐ion storage mechanism, which has never been realized thus far.