Cryptocurrency has been growing in popularity in recent years, with many people considering it an investment opportunity. But it is important to be aware that what might appear a lucrative prospect for the tech-savvy investor could actually be a risk so high that it could result in losing every penny invested.
Join us as we explore the dangers of investing in cryptocurrency, so that you are clear on the risks.
What is cryptocurrency?
Cryptocurrency is a type of digital or virtual money. Unlike physical money such as coins or banknotes, cryptocurrency exists only in the online world.
Known as ‘crypto’ for short, the currency can be used to buy goods and services, but it doesn’t come from a bank or the government. Instead, cryptocurrencies are created and managed using technology called blockchain, which keeps track of all transactions in a secure way.
The most well-known cryptocurrency is Bitcoin, but there are numerous others, including Ethereum and Litecoin.
People use cryptocurrencies to make online transactions quickly and, in some cases, anonymously. However, their value can change a great deal, sometimes even from one day to the next. And this is precisely what makes them a risky investment.
Why has cryptocurrency grown in popularity?
Despite the risks of investing in cryptocurrency, its popularity has grown considerably. These are just some of the reasons:
Potential for high returns
Many people are attracted to cryptocurrencies because of their potential to rapidly increase in value. Some early investors in cryptocurrencies such as Bitcoin have made substantial profits, sparking interest and excitement.
Decentralisation
Cryptocurrencies are not controlled by any government or central bank. Such decentralisation appeals to people who are sceptical of traditional financial institutions, and who prefer the concept of a currency that operates independently.
Privacy and security
Transactions made using cryptocurrencies can offer a higher level of privacy than those made with traditional money. While not completely anonymous, they do not require personal information to be attached to transactions, which some users find appealing.
Ease of Access
With the rise of digital platforms and apps, buying, selling, and using cryptocurrencies has become an easy pastime. This has made it possible for more people to get involved, even without too much technical knowledge.
Global Reach
Cryptocurrencies can be used by anyone with an internet connection, regardless of their location. This global reach is particularly beneficial for people in countries with unstable economies, or with limited access to traditional banking.
Innovation and new technology
The technology behind cryptocurrencies, in particular blockchain, offers new ways to handle data and transactions securely. This innovation has attracted investors and technologists who are interested in the future possibilities of this technology.
What are the risks of investing in cryptocurrency?
There are many dangers of investing in cryptocurrency that you should be aware of before making any decisions:
Volatility and lack of predictability
Crypto prices can shift all of a sudden with no warning, usually more so than traditional assets such as bonds and shares.
Because crypto values are mostly driven by whether people are buying them, it can take nothing more than a high profile social media post, influencer endorsement or a big brand or government announcement for values to move.
Take Bitcoin for example. In November 2021, its peak value was just over £51,000. By the end of December 2023, this had fallen by 31.19% to just over £35,000. For the investor who’d put in £300 at its peak, their investment would only have been worth £206.44 in December 2023.
In November 2022, the FTX cryptocurrency exchange collapsed, going from an estimated value of $32 billion to filing for bankruptcy within just a few days. Over a million customers were left unable to withdraw their assets, which were reckoned to total in the region of $8 billion.
Unregulated activities
In the UK to date, most crypto-related activities remain unregulated.
Whilst crypto businesses are required to register with the Financial Conduct Authority (FCA) and abide by their anti-money laundering rules and marketing rules, it is important to be aware that once you’ve put your money into the cryptocurrency ecosystem, there are no rules in place to protect it, unlike other types of investments.
This means that if any crypto-related investments you make go wrong, you are unlikely to enjoy access to the Financial Services Compensation Scheme (FSCS) or the Financial Ombudsman Service (FOS).
High risk investment
In comparison to shares or forex markets, crypto is still in its early days. The market is only just developing, and there are many short-term speculative traders, which means prices are prone to news and events. This makes the prospect of being negatively impacted by a significant price move very real.
Whilst cryptocurrencies are secured by advanced encryption, the currency remains susceptible to cyberattacks. Hackers have been successful in stealing from crypto exchanges and, even though some of them have tried to recover the funds, it hasn’t always been possible, leaving investors out of pocket.
In summary – the risks of investing in cryptocurrency
It is clear to see that one of the world’s most talked about investment opportunities carries significant dangers. Volatile, unregulated and high risk, cryptocurrency investment is certainly not for the risk-averse.
As well as the issues we’ve explored, it’s also important to remember that diversification of investments is usually the wisest approach. Placing everything into one investment channel is rarely advisable.
Looking for personalised investment advice?
At Partridge Muir & Warren, we have a dedicated investment management team with extensive experience in tailor-made investment strategies.
Why not get in touch to arrange your no-obligation complimentary consultation? We look forward to making sure you draw maximum benefit from your investments.