What is cryptocurrency?
Cryptocurrency is a type of currency which is wholly digital. It is still used to buy or sell things, but rather than being in the form of a physical note or coin, owners hold it in a digital wallet and buy or sell through an online exchange.
The thing that makes cryptocurrency unique is something called ‘blockchain technology’ which is what it uses to exist. All it means in real terms is that it’s based on a very complex, online network that is distributed across a lot of computers, meaning it is nearly impossible to counterfeit or double spend. It also means it exists outside the control of governments and central authorities, so these currencies are able to be maintained and valued solely by their users.
What different cryptocurrencies are there?
These days there are thousands of different cryptocurrencies. Bitcoin is the most well-known because it was the first to launch back in 2008, but other popular alternatives are Ethereum, Litecoin and Zcash.
While most cryptocurrencies are similar in the fact they are based on a decentralized system and make use of the same blockchain technology, they do also have some differences.
These differences are largely down to different coding and algorithms – so in other words, very techy things. These things will all have an impact on how widely they are adopted and whether or not they will gain or lose value, so it’s important to do some proper research into each if you’re thinking of buying some.
How is cryptocurrency used?
Just like traditional currencies, cryptocurrency was invented to be used to buy and sell things, however because it’s not been widely adopted as an official form of currency yet, you are limited with what you can 'buy' with them at the minute - we're a very long way from being able to walk into a shop and pay for a loaf of bread with crypto, for example.
Instead, because they have potential to grow in value, a lot of people currently use cryptocurrency as an alternative form of investment. In the same way someone would buy shares of a company in the hope they grow in value and can be sold for a profit, people are turning to crypto with the hope they’ll make a lot of money from it over time.
Many of the early adopters were able to make millions by investing in cryptocurrency because its rapid rise in popularity saw the value increase astronomically across the first few years. Crypto has since gained a bit of a ‘get rich quick’ reputation.
However, it’s unlikely this same level of growth will be repeated and, today, cryptocurrencies are very volatile, so it's quite a risky place for someone to invest their money. It’s important to understand where you’re putting your money before starting to invest because, without the right knowledge, there’s a high chance you could lose out.
With cryptocurrencies being so volatile, if they were to be a widely adopted form of currency, that loaf of bread you bought on a Monday with Bitcoin that had the equivalent value of £1 could cost you £0.70 or £1.30 on Tuesday!
Should I invest in cryptocurrency?
Whether or not investing in cryptocurrency is right for you really depends on what you’re looking to achieve. If you’re wanting to have a bit of a gamble and aren’t too worried about whether you get your money back or not then, sure, give it a go.
However, if (like most of us) you can’t afford to lose your money, then it wouldn’t be our recommendation to start dabbling in cryptocurrency investments. It really isn’t the ‘get rich quick’ tactic it’s made out to be - it's actually more like gambling because it really can go any way. Instead, you should speak with a financial adviser (like us) so we can review your finances and choose a more suitable investment option that’s in line with how much risk you’re comfortable taking.
What are the risks of investing in cryptocurrency?
Investing in cryptocurrency is a bigger risk than other forms of investing because there are so many unknowns. It doesn’t quite fit the mould of a traditional stock or bond, and even though they do have similarities to commodities like gold (in the way they can be bought and sold for cash based on expected future value), they actually have no physical value or use.
There isn’t a clear historic record where we can assess long-term value, so cryptocurrency value will rise and fall on an unpredictable demand cycle and people could easily lose a lot of money.
The other big risk with investing in cryptocurrency is that it currently isn’t regulated. That means no one is checking whether what crypto investment providers are claiming (including information about potential growth of crypto) is factually accurate and holding them to account on how they advertise themselves. They also don’t have to inform you of the potential risks like all other regulated investment providers would.
This leads people to believe that investing in cryptocurrency is actually safer than more traditional forms of investing, which is very far from the truth. In fact, the FCA (the UK’s Financial Conduct Authority who regulate financial services businesses including investment companies) recently issued a statement to say:
“The FCA is aware that some firms are offering investments in cryptoassets, or lending or investments linked to cryptoassets, that promise high returns. If consumers invest in these types of product, they should be prepared to lose all their money.”
Both the Government and the FCA can no longer ignore the fact that millions of people are investing in a very high, speculative investment that could potentially see them losing money they could not afford to lose. They have recognised that more needs to be done to protect people, so earlier this year they announced that the process has started to see cryptocurrency investments become regulated.
Even though this is a step in the right direction, it won’t actually be in place for a few more months yet. And even then, it’s still a risky investment to choose.
What will change when cryptocurrency investments become regulated?
There's a big report that details everything that's being changed, but we understand most people don't want to spend their time reading through that! So, here's a summary of the key things:
- Anyone advertising an investment in Crypto in the UK will have to have clear risk warnings on their adverts, like the rest of us already do!
- Cryptocurrencies and trading platforms will be banned from ‘inducing to invest’. In normal people language, that means they can’t offer you cashback, a referral scheme or an incentive to invest with them.
- On the platforms themselves, there needs to be adequate risk warnings throughout so when someone goes to invest, they’re clearly reminded about the risks before making their decision.
- They can only send promotions to you directly if you are classified as a certified, sophisticated investor, which discounts most of us already