If you invest in cryptocurrency, do it based on the facts, not the hype – and there is a lot of hype.
Before you buy and sell digital currency, know the risks so you can judge if investing in it is a good idea for you and your personal finances.
What are the risks of investing in cryptocurrency?
Governments and financial regulators in almost every country have warned investors of the risks posed by buying cryptocurrency.
When an investment starts to appear in headlines, on advertisements or through celebrity endorsements as a way to get rich, investors pile in without thinking through the risks.
Extreme volatility is a defining factor of cryptocurrency. While you may make high returns, you could lose everything.
In November 2021, around £1 million–worth of cryptocurrency scams were being reported to Santander UK by its customers each month. The real scale of fraud is much larger.
One of the most common types is when a criminal hacks into your computer and freezes you out of your account.
3. Fake promises of high returns
Cryptocurrency firms may also be overstating how much investors could receive from investing in Crypto, while minimising the risks.
4. No compensation scheme
UK bank deposits are almost always covered by protective schemes such as the financial services compensation scheme, this is often not the case for cryptocurrency investments. If a cryptocurrency exchange goes bust, there is no guarantee you will get your money back. If you lose your password, again, there is no one to go to to get it back.
Is cryptocurrency a good way to make money?
Early investors in cryptocurrencies like bitcoin will likely have made money: if you had invested £310 to buy one bitcoin in April 2016, six years later your investment would be worth about £24,000.
Bitcoin prices soared through 2021, reaching record highs of just under $67,000 in November, but dropped to $29,000 (£23,700) at its lowest in May 2022.
While that is certainly worth more than £310 for one bitcoin, it shows how volatile even the most popular cryptocurrency is. The price of bitcoin has been falling in 2022 amid a wider cryptocurrency sell-off as investors steer clear or riskier investments at a time of rising inflation and interest rates.
Some of the world’s biggest cryptocurrency exchanges are listing on mainstream stock exchanges. San Francisco’s coinbase debuted on the US Nasdaq stock market in April 2021 with a value of over $100bn (£70bn), making its market cap more than twice that of Barclays Bank.
But as of May 16, 2022, Coinbase’s value had fallen to $15bn.
New cryptocurrencies most using blockchain technology, are coming out all the time. Some are intended to replace traditional currencies such as pounds or dollars, while others are used to create new types of financial application, or swap value between various digital currencies.
So if you are considering buying into digital assets, look closely at projects individually to see how they might pan out in the future.
What are average returns for cryptocurrencies?
There is no guarantee a cryptocurrency will remain in action in the long run.
For example, of the top 10 cryptocurrencies by market value in 2013, only seven are still functioning today.
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