What are some of the risks of investing in cryptocurrency?
Governments and financial regulators in almost every country have warned investors of the risks posed by buying cryptocurrency.
That the warnings have been so emphatic and widespread is partly down to the hype around digital currencies.
When an investment makes headlines for high returns, is featured in advertisements or endorsed by celebrities as a way to get rich, investors can pile in without thinking through the possible consequences.
1. Volatility
Extreme volatility is a defining factor of cryptocurrency. While investors may make high returns, they may also lose everything.
2. Scams
In November 2021, around £1 million–worth of cryptocurrency scams were being reported to Santander UK by its customers each month. The scale of crypto fraud overall will be much greater.
One of the most common types is when a criminal hacks into an investor’s computer and freezes them out of their account.
3. Exaggerated 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
In the UK, deposits held with a regulated bank or building society are protected by the Financial Services Compensation Scheme. So if, say, a bank or building society goes bust, compensation of up to £85,000 will be available to customers through the FSCS.
Crypto assets, however, are not regulated by the Financial Conduct Authority, the regulator, (FCA) and so if the cryptocurrency exchange or platform goes bust, it is unlikely that investors will get their money back.
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