Posted on January 12, 2024 by Solidi Staff
Cryptocurrency has become a popular investment choice for many, offering potentially high returns and the excitement of a rapidly evolving market. However, the UK’s Financial Conduct Authority (FCA) has categorised Cryptocurrency as a ‘high risk’ investment and like all high risk investments, advises investors to approach these with caution.
Here’s an in-depth look at the FCA’s guidance and the critical considerations for anyone looking to invest in cryptocurrencies, as well as Solidi’s perspective on what this means for you in the context of our cryptoasset products and services we provide.
The Financial Conduct Authority (FCA) categorizes cryptocurrency investments as high risk. Despite the potential for substantial gains, the FCA emphasizes the significant volatility and unpredictability of the market. Investors should be aware that prices can fluctuate wildly up and down, often influenced by factors beyond control or prediction.
Solidi would further warn that not all crypto currencies carry the same level of ‘high risk’ – some crypto currencies, like the latest dog themed meme coin come with substantially more risk than well established crypto currencies such as Bitcoin and Ethereum.
Unlike many traditional financial products, cryptocurrency investments are not protected by the Financial Services Compensation Scheme (FSCS) or the Financial Ombudsman Service (FOS). This means that if something goes wrong—such as the platform you’re using collapsing or being hacked—you are unlikely to have legal recourse to recover your funds through these schemes. The absence of this safety net significantly increases the risk for investors. However, unlike traditional investments, investors can withdraw crypto currencies to their own crypto wallets to protect against platform failures and hacks.
Cryptocurrency markets are known for their rapid price movements. It is not uncommon for the value of a digital asset to swing by large percentages within a single day. These price fluctuations can lead to significant financial gains but also to substantial losses, often within very short periods.
If the cryptocurrency in which you’ve invested fails, you could lose your entire investment. Unlike traditional stocks or bonds, new cryptocurrencies have not necessarily been ‘approved’ prior to being sold to the public and may contain substantial unknown risks which might result in the loss of the entire investment.
Solidi would further warn that it is important to be particularly cautious of new crypto currencies promising unrealistic returns and in general keep the majority of your cryptoasset investments in lower risk, well established crypto assets such as Bitcoin and Ethereum.
In volatile market conditions, you may find it difficult to sell your cryptoassets at your desired price. The market for cryptocurrencies can be less liquid than traditional markets, meaning there may not always be a buyer at the price you wish to sell. This illiquidity can prevent you from exiting a position promptly, potentially leading to further financial loss.
The FCA advises investors to maintain a diversified portfolio to mitigate risk. It is recommended that no more than 10% of your assets be allocated to high-risk investments like cryptocurrencies. Diversification helps spread risk across various asset classes, reducing the impact of a poor-performing investment on your overall portfolio.
Solidi would further recommend that as well as only keeping 10% of your portfolio in high risk investments (such as cryptoassets), you should also consider keeping a significant percentage of your high risk investments in well established (and thus lower risk) crypto assets such as Bitcoin and Ethereum.
Investing in cryptocurrencies requires a tolerance for high risk. Prospective investors should fully understand the potential for both significant gains and substantial losses and be prepared, depending on the crypto asset invested in, to potentially lose their entire investment.
If the cryptocurrency exchange or platform you use goes bankrupt, you may lose access to your funds.
Although Solidi keeps customer funds segregated and in cold storage, there may still be a delay in returning funds to customers in an insolvency event. Therefore, for ultimate security, Solidi recommends withdrawing your digital assets to a personal cold storage solution, such as a hardware wallet, to mitigate this risk. Cold storage keeps your assets offline and out of reach of potential cyber threats or institutional failures.
The cryptocurrency space is rife with scams and fraudulent schemes. Scammers often use cold calls or social media to convince individuals to open crypto currency accounts and then transfer funds to them with the promise of large returns. Investors SHOULD NEVER act on the advice of someone who contacts them unsolicited. Always conduct thorough research and consult reputable sources before making any investment decisions. Once you withdraw crypto assets, the transaction cannot be reversed, undone or refunded and therefore you must be completely confident of where and to whom you are sending funds.
While the potential for high returns makes cryptocurrency an attractive investment, it comes with significant risks that cannot be ignored. The FCA’s guidance underscores the importance of approaching this market with caution, being fully aware of the level of protection and the high volatility involved. By staying informed and following regulatory advice, investors can better navigate the complexities of the cryptocurrency landscape and protect their financial interests.