If you are thinking about investing in Bitcoin, Ethereum or any other cryptocurrencies, read this first.
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Making news for all the wrong reasons
Cryptocurrencies are one of the world’s most controversial assets.
Those in favour insist fortunes can be made by investing and trading digital money. The more sceptical, however, argue it’s complicated and a fast track way to losing your savings.
Research from the FCA has warned that many buyers see cryptocurrencies as a way to 'get rich quick' and that "consumers may not fully understand what they are purchasing".
What's more, scammers have rapidly targeted those new to the arena, with FCA data showing that investors lost £27 million to crypto and forex scams in the 2018/19 financial year.
The typical victim lost around £14,600; a life-changing sum for most.
A brief background
Cryptocurrencies have actually been around for more than a decade, with Bitcoin starting its life in 2008.
A still-unknown scientist using the pseudonym Satoshi Nakamoto unveiled his concept in a whitepaper entitled: ‘Bitcoin: A peer-to-peer electronic cash system’.
While Bitcoin remains the dominant currency, there are now hundreds of other players in the market, including Ethereum, Peercoin, Litecoin and Ripple.
Having soared in value during 2017, reportedly turning early investors into overnight millionaires, they have since endured a rockier ride with plummeting valuations. And despite the hype, just 3% of UK adults have bought crypto assets, according to the FCA.
So, are they worthy of further investigation or should you steer clear?
This article is part of a wider series on investing, covering all areas from stocks and shares to buy-to-let, peer-to-peer and alternative investments. Click here to view the full guide.
What are cryptocurrencies?
Why have they become so popular?
Digital currency enthusiasts believe they will shake up the monetary system in the same way Uber and AirBnB have done to their respective industries.
They point to the fact trust in traditional markets is low in the wake of the financial crisis a decade ago and people are increasingly comfortable with the online world.
The combined market value of all cryptocurrencies was $27bn, according to the Centre for Alternative Finance’s ‘Global Cryptocurrency Benchmarking Study’ in 2017.
The department, which is part of the University of Cambridge, estimated there were between 2.9 million and 5.8 million users of cryptocurrency wallets, which are used to hold the currencies.
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How have cryptocurrencies performed?
How can you get involved?
You can either buy cryptocurrencies at the current market value – or trade based on price movements via financial strategies such as a spread bet or CFD (contract for difference).
With the former, you need to have what is known as a virtual wallet in order to buy and hold cryptocurrency. Do your research before selecting a virtual wallet provider.
With the latter, you don’t hold the actual currency, but are merely speculating on movements you expect in the underlying market.
There are pros and cons with each so consider trying your hand via a demo account, which are offered by several investment platforms.
It's also important to consider how you could exit the market. The FCA has warned that many crypto asset holders don't appear to have any strategy to sell their assets and that doing so can be difficult.
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What are the risks?
Cryptocurrencies and regulation
Cryptocurrencies are not currently regulated by the Financial Conduct Authority.
However, firms that sell cryptocurrencies derivatives, such as futures, contracts for differences (CFDs) and options do need to be FCA-regulated. You can check the FCA register here.
The Cryptoassets Taskforce, established by the Chancellor of the Exchequer last year, has been investigating cryptocurrencies with a view to possible regulation.
“Online consumer surveys suggest that cryptoasset ownership rates among UK survey respondents are between 5-10% (in line with other G7 economies), however figures for the wider population are likely to be lower,” it read.
Its final report noted that although the UK wasn’t yet a major player in the cryptoassets world, although interest and activity in them had grown over the last few years. Mainstream financial services firms, meanwhile, were found to be taking their first steps into this market.
“The Taskforce has concluded that cryptoassets pose a range of risks, notably to consumers (who may face large losses), market integrity (due to manipulation and other market-abuse style strategies) and financial crime,” it stated.
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Scams and fraud
The future of cryptocurrencies
Cryptocurrencies could develop into a new asset class in the future, but they need more regulation and security to provide more trust and transparency, according to a report from Deutsche Bank Wealth Management.
The study found that cryptocurrencies were a ‘highly speculative and unregulated risk investment’ and concluded money functions and scalability problems meant it couldn’t be assumed that they would replace real currencies.
“We rank cryptocurrencies as a risky investment, because recent price increases are in part based on speculation,” it read. “Volatility is very high and reached 80% and the whole sector is generally unregulated."
Please note that the purpose of this article is simply to inform and should not be seen as an endorsement of cryptocurrency trading. We strongly advise you seek financial advice before making any investment decisions.