Even if you’ve never considered investing in cryptocurrency, also known as “cryptoassets”, the chances are, you’ve heard of the term. As more people invest in them, understanding what it means, and the risk associated with investing in these types of assets could be valuable.
According to the Financial Conduct Authority (FCA), as of August 2024, around 12% of UK adults, or 7 million people, own cryptoassets. Yet, almost everyone (93%) has heard of them.
In simple terms, cryptocurrency is a type of electronic cash. However, it offers an alternative way of storing value, with transfers and payments occurring through a peer-to-peer system. This means you can send and receive cryptocurrency without an intermediary, such as a bank.
The value of cryptocurrency changes, which means some people invest in it hoping that the value will rise. However, it’s often unpredictable.
According to the Bank of England (BoE), between 2015 and 2024, the value of the pound did not change by more than 10% in one day. In contrast, Bitcoin, one of the most popular types of cryptocurrency, experienced far more volatility. Indeed, it increased by 22% one day and fell by 26% on another during the same period.
Bitcoin wasn’t invented until more than 20 years after the first cryptocurrency was conceptualised
While Bitcoin might be one of the most commonly known cryptocurrencies and the largest by market capitalisation, it wasn’t the first.
In fact, the first cryptocurrency was proposed in 1983 by American David Chaum. He conceptualised a token currency called eCash that could be transferred between individuals privately.
Bitcoin, which was invented in 2008, built on Chaum’s and others’ ideas to become the first decentralised cryptocurrency. The ups and downs of Bitcoin’s value have made headlines, with early investors seeing the value of their assets soar.
As well as Bitcoin, there are thousands of different cryptocurrencies available today, including Ethereum, Tether, and Binance Coin. The cryptocurrency landscape is constantly evolving, and new coins are created every year.
Potential high returns are enticing investors, but they aren’t guaranteed
There are many reasons why investors might be enticed by cryptocurrency, including the potential returns.
In the past, cryptocurrency has made headlines when its value has soared, which may make it seem like an asset to invest in if you want to get the most out of your money. However, as with other asset classes, the greater the potential return, the more risk you’re likely to be exposed to.
Some investors could find they’re disappointed by the returns cryptocurrency delivers too.
An April 2023 report from the Financial Services Compensation Scheme (FSCS) found that around a third of cryptocurrency investors didn’t see returns in line with their expectations.
Worryingly, the FSCS report suggests some are investing in cryptocurrency due to a fear of missing out.
Indeed, 80% of people who have invested in cryptoassets said one of their motivations to invest was being “swayed by the hype”. Following the investment decisions of others could mean you make choices that aren’t right for your goals or circumstances, including taking too much investment risk.
Investing in cryptocurrency is typically high risk
As mentioned, cryptocurrency is typically a high-risk investment and not suitable for many investors as a result. In fact, the BoE warns the value of cryptocurrency could fall to zero, which would make the asset worthless.
In addition, there are other risks to weigh up before you decide to invest in cryptocurrency, including:
- Cryptocurrency remains unregulated in the UK. So, if something goes wrong, it’s unlikely you will be protected and you could lose all of your money.
- Similarly, cryptocurrency typically falls outside of existing consumer protections, which could mean there’s a lack of recourse should you face challenges and want to seek compensation.
- While other assets can rise and fall in value, historical data suggests stocks, shares, and bonds deliver returns over a long-term time frame, though this cannot be guaranteed. As a relatively new asset, there is a lack of historical data on cryptocurrency, which can make it even more uncertain.
- Some forms of cryptocurrency are difficult to sell and convert to cash without losing some of its value. This could present some challenges if you need to access the wealth tied up in cryptocurrency quickly.
While cryptocurrency may seem like an exciting investment opportunity, it’s important to weigh the potential returns against the risks and ensure it’s appropriate for you.
Get in touch to talk about your investments
If you’d like to discuss how investing in a range of assets may help you reach your financial goals, please get in touch. We could work with you to create an investment strategy that suits your needs and financial situation.
Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Crypto assets are not regulated financial products so please be aware that trading them carries a considerable amount of risk for your capital. Cryptocurrencies are also not covered by existing consumer protection laws.
