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Five things to consider about cryptocurrencies

Before investing in cryptocurrencies, consider these five things…

Cryptocurrency rollercoaster illustration

Cryptocurrencies, also known as cryptoassets, cryptocoins, payment tokens or exchange tokens are getting a lot of press coverage. The price fluctuations of Bitcoin, Ethereum, and Cardano to name just a few have made some wealthy, while others have lost fortunes. Although they are nearly impossible to forge or track due to the way they’re created, this doesn’t stop them from being a risky investment.

While some individuals have made a lot of money from investing in cryptoassets, the risks are high. The Financial Conduct Authority (FCA) does not regulate most cryptoassets, so FSCS cannot protect you if a platform that exchanges or holds them goes out of business. See the FCA’s cryptoasset page for the most up to date information. If you’re thinking of investing, you should consider getting independent financial advice about the risks. Here are five things to consider:

  1. Volatile value The market value of cryptoassets can be extremely volatile. You could lose a lot, and quickly. It’s also worth remembering that there are many competing blockchain companies looking for your investment (blockchain is the technology behind cryptoassets and cryptocurrencies) and that some will inevitably fail. 
  2. Theft Cryptocurrencies can only be bought and sold on cryptocurrency exchanges. These exchanges are a tempting target for hackers and security breaches have led to the theft of digital currency, with not all investors getting their money back. 
  3. Hard to spend You can’t spend cryptocurrencies like cash as few retailers accept cryptocurrency as payment. So, generally you have to sell them on an exchange, with their associated security issues. If you’re storing your cryptocurrency on a password-protected personal hard drive or memory stick and you lose or forget the password, you may well have lost access to your investment altogether.
  4. Unregulated Cryptocurrencies are largely unregulated. If your funds are stolen, there isn’t an easy way to get your money back, and FSCS can’t protect you. And as the industry is still developing, there are scams involving cryptocurrency investments that are hard to distinguish from genuine investment opportunities.
  5. Unprotected Cryptocurrencies generally aren't protected by organisations like the FCA or FSCS. Also, trading in cryptocurrencies depends on permission from the national authorities involved. Recently, China's central bank announced that all transactions of cryptocurrencies are illegal, effectively banning Bitcoin, and making it impossible for people to cash in their investments

As with every investment decision, it’s really important to know the risks before you invest. See how we protect other investments and also visit the FCA’s website.

 

Channel website: https://www.fscs.org.uk/

Original article link: https://www.fscs.org.uk/news/protection/cryptocurrencies-risk-cover/

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