As cryptocurrency gains in popularity, we need to spell out the risks

Daniel Roberts, Independent Financial Adviser at Innes Reid takes a look at cryptocurrencies.

We have to acknowledge there has been a significant rise in the ownership of cryptocurrencies over the last few years. In fact, the Financial Conduct Authority (FCA) estimates that 2.3 million adults in the UK now hold some type of cryptocurrency, which is not an insignificant number.

Professional investors and institutions are considering cryptocurrencies too with a growing number reporting the use of them as a complement or alternative to more mainstream investments. However, cryptocurrencies should not yet be considered a mainstream investment and, like all speculative assets, should be left to the professionals.

Retail investors should heed the latest FCA warning:

“Because these products are largely unregulated, if something goes wrong they are unlikely to have access to the Financial Services Compensation Scheme or the Financial Ombudsman Service.”

The FCA has also warned that consumers should “be prepared to lose all their money.” Alarmingly, although three quarters of individuals said they had heard of cryptocurrencies in a recent survey, only 1 in 10 said they were aware of these serious warnings issued by the FCA.

It’s clear the FCA is increasingly concerned about cryptocurrency ownership and they continue to highlight the potential risks that holders should be aware of. These warnings, along with the untamed and extreme volatility in the value of cryptocurrencies, should cause alarm bells to ring.

Even the most well established Cryptocurrency, Bitcoin, is around six times more volatile than traditional assets such as Gold or UK Shares.

Investing yourself?

If you are looking to invest you need to understand what drives the price up and down and how to get out when you want to (or need to). The level of risk you are willing to undertake is personal to you. Those who want to invest must do their research before committing and be prepared to suffer dramatic losses.

Positive move or positively gambling?

Cryptocurrencies may have the potential to reshape the current financial system. They offer access to basic banking facilities for example the safe storage/transfer of value (buying and selling), accessibility of loans and interest on savings. Cryptocurrencies can speed up cross-border payments and reduce significant fees for both people and institutions. They are also secure in terms of data, due to the encryption technology that lies behind the cryptography, which underpins them.

However, in much the same way as the internet promised a revolution in the exchange of information in the 1990s, cryptocurrencies are still very much in the early days of changing the banking system as we know it. It is impossible to know the winners from the losers, much akin to knowing in 1996 if Ask Jeeves or Google would become a major player or disappear into oblivion. This is effectively what fuelled the dotcom boom of the late 1990s/early 2000s and led to a significant number of people losing large amounts of money.

At the moment it is very similar to gambling. It’s effectively trying to back the right horse. There are over 2000+ different runners (cryptocurrencies) to pick from and this number is growing all the time. It is likely that only 1% of these will ever end up being adopted by the mainstream financial system, if any, and the others will fade away like so many of those early internet companies.

Gambling sites often say only gamble what you can comfortably afford to lose. If you are going to commit your savings to cryptocurrencies at this early stage then that is the attitude you should take. With no way to value cryptocurrencies or anticipate trends, it should be considered an 11 out of 10 on the risk scale.

Dan’s expert opinion

Huge amounts of speculation make it extremely difficult for even the small number of people who do understand the cryptography behind it to make the right call, let alone your mate down the pub who has made a few quid on Dogecoin!

Innes Reid will always stand firm in recommending long-term investments over speculative gains and cryptocurrencies should definitely be considered highly speculative at present. Remember, if it sounds too good to be true, it probably is.

Don’t leave your investments to chance. For expert advice and financial clarity contact our team today: 01244 347583 or email info@innesreid.co.uk

This article is not personal advice.

Source: Financial Conduct Authority.

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The Financial Ombudsman Service (FOS) is an agency for arbitrating of unresolved complaints
between regulated firms and their clients. Further details of the FOS can be found on its website:
www.financial-ombudsman.org.uk