Don’t assume you have full protection if crypto investing goes wrong

Summary

The Government and FCA must speed up the regulation of cryptocurrencies to avoid investors being caught out if the price of crypto assets like bitcoin blows up.

More people are aware of cryptocurrencies and buy them, yet an alarming number of people wrongly assume there is protection from the UK financial regulator if anything goes wrong, judging by new FCA research. The fact one third of people in the FCA’s survey believe they could raise a complaint with the regulator if something went wrong and they were seeking recourse or financial protection is worrying.

Crypto assets are extremely volatile, and the regulator has dragged its feet with creating a proper framework for the asset class. To date, the FCA only regulates crypto around anti-money laundering and marketing which means there is no proper safety net if things go wrong. We could now be at a turning point as the Government has indicated it will publish a proper regulatory framework next year.

It’s clear public interest in crypto is growing, helped by the bitcoin price shooting up this year amid US President-Elect Donald Trump talking up the asset class. If bitcoin smashes through the $100,000 level – which it is only a whisker away from doing – then even more people could find crypto on their radar.

Regulation is long overdue as the greater the public awareness of crypto, the more we could see people dip their toe in the water, and not everyone knows what they are doing. Crypto assets are unsuitable for many investors as the asset class is extremely volatile.

Research last year from the FCA found that 46% of new investors hold crypto assets. Many were motivated to invest in high-risk assets for emotional reasons, such as wanting some excitement or for a novelty factor. This rush to high-risk investing has a worrying underbelly to it, with half of those buying these assets having at least one characteristic of financial vulnerability, or no or low appetite for investment risk.

Another concerning factoid from the FCA’s research last year was that three in five people who have 25% or more of their investible assets in high-risk investments say that a significant investment loss would have a fundamental, negative impact on their lifestyle – highlighting a clear mismatch between their investment holdings and their risk tolerance.

Individuals might have read about bitcoin more than doubling in price this year and concluded it is an exciting place to put money. Yet they might not be aware of the multiple occasions in the past when its value has slumped over short periods of time. Crypto assets are as far removed from a ‘sleep-at-night investment’ as you can get, and investors should be prepared to lose any money they invest in the asset class.