In May 2010 Laszlo Hanyecz bought two large pizzas from Papa Johns using 10,000 bitcoin (the equivalent of £30). This bitcoin today would be worth more than £170 million.
Fast forward to 2022, we see crypto adverts plastered all over the Tube on our morning commutes, scrolling on Instagram we see crypto traders promoting their lavish lifestyles and WhatsApp groups with our friends now include speculation about the latest coins.
Being surrounded by the noise of crypto and stories of those who have made their fortune from investing in it, no wonder that many people get FOMO and think ‘if they can do it, then why can’t I?’
According to the Financial Conduct Authority, as of June last year, 2.3 million Brits had invested in crypto, but what is frightening is that 14 per cent said they had borrowed to invest and 18 per cent said they did so due to fear of missing out.
The cost of living crisis means that more people are struggling financially and naturally this makes the promise of extremely high returns sound very appealing. The danger is that those more likely to try and invest in ‘get quick rich’ schemes are the most vulnerable, as they cannot afford to lose money.
So, what actually is cryptocurrency?
Cryptocurrencies are virtual currencies that are bought and traded online. You can send cryptocurrency directly to another person without needing to use a third party (such as a bank) to process the transaction.
While digital currencies are likely to be the future of money, in many countries they are not yet considered legal tender or regulated so there is a long way to go. If you are thinking of investing your money into them, it’s crucial that you fully understand the risks before doing so.
Is crypto regulated in the UK?
In short, no. For investments to be regulated by the Financial Conduct Authority, they must meet strict standards that treat customers fairly. If things go wrong with these investments, you are likely to have access to the Financial Services Compensation Scheme and Financial Ombudsman which were set up to protect and compensate investors.
By contrast, cryptocurrencies are not regulated in the UK, which means there is no financial protection and zero compensation for people who lose their digital assets.
The Financial Conduct Authority website advises: “the FCA has not been given regulatory oversight over direct investments in cryptoassets. There are no consumer protections. As a result, if you buy cryptoassets you should be prepared to lose all the money you invest.”
How risky an investment is crypto?
In terms of risk, cryptocurrencies are way up there at the top. They are extremely volatile, meaning the value can bounce around a lot, both up and down - one month in 2018 the price of Bitcoin fell by 65 per cent.
Crypto is a speculative investment and its value can be altered by something as simple as a tweet. Research suggests that previous tweets from Elon Musk around certain cryptocurrencies have directly impacted their value – something which has been coined the ‘Musk Effect’. Imagine having the value of your life savings depend on the tweet of one man.
How common are crypto coin scams?
As interest in cryptocurrency investment has increased, naturally so have scams and fraud.
Scammers target consumers who search for investments online, in particular when using search engines like Google and Bing. They use professional-looking websites and often falsely claim endorsements from prominent individuals and there have been a number of high-profile coin scams to date.
The key takeaway from this is that if you do plan on investing in crypto, make sure you do your due diligence and always follow these five steps before committing any of your savings.
Five steps to consider before investing in crypto
- Never invest in something that you don’t understand (and don’t be pressured into investing anything).
- Ask yourself: can you afford to lose all of the money you’re investing? If the answer is no, then it’s not worth taking the risk.
- Do your research. The FCA has a list of firms that have registered to carry out crypto business in the UK. It also has a warning list of unregistered and clone businesses that are not authorised. Check it before committing any cash.
- Remember that, if returns sound too good to be true, they probably are.
- Finally, consider seeking independent financial advice. If you’ve decided you definitely want to invest, it’s a good idea to seek independent financial advice from people like me at First Wealth on the best options that are the most suitable for you and your circumstances. There are plenty of reputable services that can help you search for a financial adviser based on what you’re looking for help with, including Unbiased, Vouchedfor and The Personal Finance Society.
