Ownership of cryptoassets is rising among UK investors and, while still relatively new, they are growing in popularity. But before you purchase crypto, it’s important to understand what the term means and if they have a place in your portfolio.
According to the Financial Conduct Authority (FCA), 2.3 million adults now hold cryptoassets, compared to 1.9 million last year. Awareness has also increased, with almost 8 in 10 adults having heard of cryptoassets. However, the findings also suggested many people don’t fully understand what “crypto” means. Only 71% of those that have heard of cryptoassets correctly identified the definition of “cryptocurrency” from a list of statements.
What does “cryptoasset” mean?
Cryptoasset is a term used for digital assets that use cryptographic techniques – a method of protecting information through codes – to verify transactions. Cryptocurrency is one of the most popular types of cryptoassets and bitcoin is among the most well-known. Much like other assets, you can buy and sell cryptoassets. As the value changes over time, you can make or lose money.
Bitcoin has famously increased in value over the last decade, but it’s also important to note that it’s experienced periods of volatility and some investors have lost money. Cryptoassets are considered very high-risk, speculative investments. As a result, they’re unlikely to be suitable for the majority of investors.
Despite this, only 1 in 10 people who had heard of cryptoassets said they were aware of consumer warnings. And just 43% said these warnings discouraged them from investing.
The FCA research also found 12% of people who had already purchased cryptoassets were not aware the assets were not protected.
Sheldon Mills, FCA’s executive director, consumers and competition, said: “It is important for customers to understand that because these products are largely unregulated that if something goes wrong, they are unlikely to have access to the Financial Services Compensation Scheme or the Financial Ombudsman Service. If consumers invest in these types of products, they should be prepared to lose all their money.”
If you’re thinking about investing in cryptoassets you should keep in mind:
- Cryptoassets are high risk, and you could lose all your money.
- The performance of cryptoassets is volatile.
- Most crypto exchanges and assets are not regulated, so you aren’t protected.
- Converting cryptoassets back into cash can be difficult and will depend on market conditions.
- Fraudsters use a lack of awareness about cryptocurrency, so be cautious of guaranteed or high returns, or time-sensitive offers.
What’s enticing people to buy cryptoassets?
There are many reasons why people may be thinking about investing in cryptoassets. For a small portion, it may make sense for them financially and be in line with their risk profile.
However, previous FCA research has indicated that some investors are getting involved in high-risk assets even though they’re not suitable for them. Some 6 in 10 investors in these assets said a significant investment loss would have an impact on their lifestyle. Among the reasons for investing were emotions and the thrill of it, as well as the social status that it can deliver.
The FCA commented: “This is particularly true for those investing in high-risk products for whom the challenge, competition, and novelty are more important than conventional, more functional reasons for investing like wanting to make their money work harder or save for their retirement. 38% of those surveyed did list a single functional reason for investing in their top three.”
So, if you’re thinking about investing in cryptoassets, it’s also important to think about the reason why.
Your goals should always play a key role in your investment decisions. Investments also need to reflect your wider circumstances. If you’re investing for retirement and may not reach your goals if you lost money, cryptoassets are not likely to be the right option for you. However, if you have spare money that you’d like to invest to enhance your retirement lifestyle, but losing it would not impact your financial security, higher-risk investments may be an option worth considering.
Remember: investing is a marathon, not a sprint. You should always invest with a long-term outlook. While the movements and fast rises of some cryptoassets can seem attractive, their value can fall just as fast and it’s the overall trend you should focus on.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment 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.