Consumers have been warned of the dangers on investing in cryptoassets, including Bitcoin, by the Financial Conduct Authority (FCA), and have been told that those considering these types of investments should be prepared to lose all their money.
On Monday, the FCA issued a warning to consumers that investing in cryptoassets, or investments and lending linked to them, generally involves taking very high risks with their money. The FCA has also warned consumers that for cryptoasset-related investments, they are unlikely to have access to the Financial Ombudsman Service (FOS) or the Financial Services Compensation Scheme (FSCS) should something go wrong.
The FCA has outlined the main risks of investing in cryptoassets as:
• Consumer protection: Some investments advertising high returns based on cryptoassets may not be subject to regulation beyond anti-money laundering requirements.
• Price volatility: Significant price volatility in cryptoassets, combined with the inherent difficulties of valuing cryptoassets reliably, places consumers at a high risk of losses.
• Product complexity: The complexity of some products and services relating to cryptoassets can make it hard for consumers to understand the risks. There is no guarantee that cryptoassets can be converted back into cash. Converting a cryptoasset back to cash depends on demand and supply existing in the market.
• Charges and fees: Consumers should consider the impact of fees and charges on their investment, which may be more than those for regulated investment products.
• Marketing materials: Firms may overstate the returns of products or understate the risks involved.
Over the last few years crytoassets have been gaining interest from investors but, as the FCA warning highlights, it remains a highly risky type of investment. As Laith Khalaf, financial analyst at the investment platform AJ Bell, explained: “The regulator is clearly concerned that the high risks already inherent in cryptoassets are being compounded by scam activity, as well as unregulated firms targeting consumers with marketing material that highlights the rewards, but not the potential downside, of investing in cryptoassets. You can see how the rapid price appreciation of Bitcoin, combined with aggressive marketing and low interest rates on cash, creates a perfect storm for consumers looking to get a decent return on their money.
“Unfortunately, Bitcoin and other cryptoassets are subject to dramatic price falls as well as rises. Consumers should be on high alert for unsolicited communications linked to Bitcoin or other crypto currencies and should consider any marketing material with an extremely critical eye. They should also make sure any firm they are dealing with is regulated, or at least has temporary permissions from the regulator.
“Irrespective of what you think the future for cryptocurrencies might be, there’s no denying that they are highly volatile and therefore sit at the precarious end of the risk spectrum. Products that are linked to cryptocurrencies might also be complex and hard to understand, further muddying the waters. Consumers probably can’t fall back on the Financial Services Compensation Scheme if things go wrong either.
“Much has been made of the fact that Ruffer, an investment company known for its conservative investment style, recently invested in Bitcoin for the first time. However, it’s important to note that the investment manager only invested around 2.5% of a portfolio that is otherwise invested in more traditional assets. Even if things go wrong in the cryptomarket, they have protection in their other investments.
“The fear is that consumers are leapfrogging stocks and bonds and going straight from cash to Bitcoin, in the mistaken belief it’s much the same. Buying Bitcoin and other cryptocurrencies should be something you do with money you are prepared to lose and after you have already built up a sizeable portfolio. If you haven’t got a stocks and shares ISA, then you should seriously stop and consider whether you should be investing in Bitcoin.”
Consumers looking to set up an investment portfolio should be aware that the majority of investments come with the risks and could result in them not gaining any interest, or potentially losing all the money initially invested as well. Due to the risks involved when investing, those considering making investments should consider seeking advice from an independent financial adviser first.
When making investments, often investors are advised to diversify their investment portfolio, meaning that they should invest in several different types of investments rather than putting all their money in one investment. For example, an investor may want to spread their money across investments in gold, property and stocks and shares ISAs. The types of investments they choose, as well as how diversified the portfolio is, would depend on a range of factors including the investor’s appetite for risk, the amount being invested and the length of the investments – which an independent financial adviser would be able to provide help in choosing.
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