• Mansoor Ahmad

Risky business

Updated: Jul 13, 2021

Buying cryptocurrencies can be complicated and let's be honest, seem like a minefield, but allow us to break it down for you and start with the basics.

Firstly, it's a very risky business and many have been burned! Investing is not a guaranteed way to make money, so make sure you know the risks and can afford to lose the money. Cryptocurrencies are a speculative investment, with limited track records and no underlying value. Newer cryptocurrencies are the most risky, as it is harder to tell if they are legitimate - this means you are more open to fall for a scam.

UK crypto asset businesses must register with the Financial Conduct Authority (FCA), so check to see if they are on the Financial Services Register or on a list of firms with temporary registration. There is also a list of businesses not registered - which may mean they are operating illegally. Even if they are on the list the city watchdog is not responsible for regulating them and does not have any power over how the firms conduct business with customers.

As cryptocurrency firms are not regulated in the way that other financial firms are, this means that you won't have any protection if things go wrong. For example, you won't be able to take a complaint to the Financial Ombudsman Service.

Cryptocurrencies can be highly volatile, so be aware that your cash can go down as well as up in an instant.

The Financial Conduct Authority (FCA) has some warnings about the potential risks of investing in cryptocurrencies:

  1. Consumer protection - some investments that advertise high returns based on crypto assets may not be subject to regulation, apart from anti-money laundering requirements. Imagine the Wild Wild West without the Sheriff..

  2. Price volatility - significant price volatility in crypto assets, as well as the difficulties of valuing them reliably, puts consumers at a high risk of losses.

  3. Product complexity - the complex nature of some crypto products & services can make it hard for consumers to understand the risks. For example, there is no guarantee that crypto assets can be converted back into cash, as this depends on demand and supply existing in the market.

  4. Charges & fees - consumers need to consider the impact of fees and charges on their investment, which may be more than those for regulated investment products. There are fees to be paid when you buy and sell your cryptocurrency.

  5. Marketing materials - firms may overstate the returns of products or understate the risks involved, in order to pull you in to buying cryptoassets.

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