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Cryptoasset investors warned they could lose all their money

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Investors in high risk cryptoassets are being warned by the City watchdog that they should be “prepared to lose all their money”, as Bitcoin value falls by a fifth in just three days.

Investments in cryptoassets, or lending or investments linked to cryptoassets which promise high returns should be approached with caution, the Financial Conduct Authority (FCA) has warned.

It said it’s aware that some firms are taking very high risks with investors’ money, adding that the product complexity, price volatility and impact of fees are of concern.

The warning comes as Bitcoin is now trading at around $34,400, down 17% from the $41,500 peak it reached just three days ago on 8 January.

Further, for crypto-related investments, investors are unlikely to be protected by the Financial Ombudsman Service (FOS) or the Financial Services Compensation Scheme (FSCS) if things go wrong.

As such, investors in high risk speculative investments such as cryptocurrencies need to understand what they’re getting involved in, as well as the risks and any regulatory protections that apply.

If anyone’s contacted out of the blue, pressured to invest quickly or promised returns that sound too good to be true, you should be wary.

Since 10 January 2021, all UK cryptoasset firms must be registered with the FCA under regulations to tackle money laundering. Operating without a registration is a criminal offence.

Investing in cryptoassets

The FCA has set out points for investors in cryptoassets to consider:

  • Check if the firm is on the Financial Services Registeror list of firms with Temporary Registration
  • If not, ask the firm whether it is entitled to carry on business without being registered with the FCA.
  • If they’re not, the FCA suggests withdrawing their cryptoassets and/or money. This is because the firm is operating illegally if it has not ceased trading by 9 January 2021.

‘Perfect storm for consumers’

Laith Khalaf, financial analyst at AJ Bell, said: “The idea of getting rich quick is as dangerous as it is attractive and anyone who invests in cryptocurrencies should be prepared to lose their shirt, or a considerable portion of it.

“The regulator is clearly concerned that the high risks already inherent in cryptoassets are being compounded by scam activity, as well as unregulated firms targeting consumers with marketing material that highlights the rewards, but not the potential downside, of investing in cryptoassets. You can see how the rapid price appreciation of Bitcoin, combined with aggressive marketing and low interest rates on cash, creates a perfect storm for consumers looking to get a decent return on their money.”

Khalaf added that Bitcoin and other cryptoassets are subject to dramatic price falls as well as rises which means investors should be on high alert for unsolicited communications linked to Bitcoin or other cryptocurrencies and should consider any marketing material with an extremely critical eye.

“Irrespective of what you think the future for cryptocurrencies might be, there’s no denying that they are highly volatile and therefore sit at the precarious end of the risk spectrum. Products that are linked to cryptocurrencies might also be complex and hard to understand, further muddying the waters. Consumers probably can’t fall back on the FSCS if things go wrong either.

“The fear is that consumers are leapfrogging stocks and bonds and going straight from cash to Bitcoin, in the mistaken belief it’s much the same. Buying Bitcoin and other cryptocurrencies should be something you do with money you’re prepared to lose and after you have already built up a sizeable portfolio. If you haven’t got a stocks and shares ISA, then you should seriously stop and consider whether you should be investing in Bitcoin,” he added.

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