Should I be careful with cryptocurrencies?

The first thing you should know: the objective of this article is not to explain in depth what cryptocurrencies are, how they are governed or how investing in them. Our goal is to give you a snapshot to help you understand what this word means. In other words, this post is not a guide to investing in cryptocurrencies.

Cryptocurrency was once a niche interest for the tech-savvy but has surged into the mainstream financial landscape over the past decade. Bitcoin, the pioneering digital currency, has captured headlines with its meteoric rise in value, prompting both awe and scepticism in equal measure. With a number of global brands subsequently accepting it for payment, it has also gained a certain respectability.

A huge array of alternative cryptocurrencies (often referred to as altcoins or cryptos) have also emerged, offering diverse opportunities for investors. Yet, amid the hype, excitement and promises, the question persists: Should I invest in cryptocurrency?

Before delving into this question, it's essential to understand what a cryptocurrency actually is and how it works.

Cryptocurrencies are digital tokens that use cryptography for security, operate on decentralised networks based on blockchain technology, and allow people and businesses to make payments directly to each other through an online system.

Unlike regular currencies though, cryptocurrencies rarely have legislated or intrinsic value; they are simply worth what people are willing to pay for them in the market. This is in contrast to conventional currencies, such as the US Dollar or Euro, whose value is underpinned by them being deemed legal tender by governments or central banks.

As a result, whilst a €50 note will still be worth €50 tomorrow, €50 of cryptocurrency could be worth €100 but it could also be worth nothing.

Of course, this volatility is one of the things that makes cryptocurrencies an exciting investment for some people. Where else can you double, triple or multiply your investment tenfold in a short time? After all, there are lots of people on the internet and social media who seem to have made small, and sometimes, huge fortunes by investing in them.

But herein lies the problem with cryptocurrencies. They are an extremely high risk and complex investment that is largely unregulated. Anyone investing in them is unlikely to be protected if something goes wrong and they lose their entire investment.

Many critics of cryptocurrencies see them as more of a speculation than an investment; a bit like buying a piece of land in the hope of finding gold or going to a casino and playing roulette. Some people hit the jackpot and reap their rewards but for many more people they just end up with dirt or empty pockets.

An intrinsic problem with investing is cryptocurrencies is that so much of their value is driven by rumour, hope, hype and greed. That was certainly the case with FTX, one of the world’s largest cryptocurrency exchanges. FTX attracted millions of customers, including A-list celebrities, who used the platform to buy and trade cryptocurrency. All was fine for a while with FTX’s co-founder, Sam Bankman-Fried, gaining celebrity status for the apparent success of FTX and its customers. However, when an executive at a rival business Tweeted that FTX was in financial difficulty in 2022, rumours spread like wildfire and there was a sudden rush by customers to sell the cryptocurrencies they held on the platform. This caused their value to slump and FTX’s rapid implosion with people losing many millions of dollars. In some cases, people were even bankrupt.

Subsequently, Bankman-Fried was convicted of defrauding customers of his now bankrupt firm and sentenced to 25 years in jail. At his trial it was revealed that he had taken more than $8bn from customers and used it to fund an extravagant jet-set lifestyle.

This is, of course, an extreme example of when cryptocurrency investing goes wrong and not all cryptocurrency “success” is based on a  web of lies and deceit. However, it should be a stark warning for anyone considering investing in the unregulated and highly volatile world of cryptocurrencies that not all that glitters in gold.

Nonetheless, cryptocurrencies are still a huge area of investment with American business magazine Forbes recently estimating that $2.7 trillion is invested across the 13,559 cryptocurrencies it currently tracks!

So, if you are still considering investing in cryptocurrencies our suggestion is that you consider the following before investing even a single cent:

• Never invest in something you don’t really understand it, so learn about cryptocurrencies and how they work. In short, do your research, as you should with any investment.
• Base any investment on facts, not the hype!
• Appreciate that regulation around cryptocurrencies varies dramatically from country to country. As a result, your investment may not be protected if anything goes wrong.
• Fully understand the risks an investment in crypto entails so you can judge for yourself if investing your hard earned money is really a good idea.
• Recognise that, like any investment, cryptocurrency should only ever be a part of a wider, diversified investment portfolio.
• Understand that the volatility in many cryptocurrencies can make for a bumpy, nervy, ride for investors so it’s not for the fainthearted.
• Be prepared to lose all of your investment, so only invest what you can afford to lose.
• If you are in any doubt, seek advice from a financial adviser.

The decision to invest in cryptocurrencies is, naturally, a highly personal one that will depend on your circumstances, risk tolerance, and investment objectives.

While cryptocurrencies have the potential to make you a profit, they also carry significant risks and uncertainties. Ultimately, it’s probably not a good idea to invest in cryptocurrencies unless you are prepared to lose all of your investment.

Remember, your investments can go up and down and you could end up with less than you started with. Past performance does not guarantee future results. The information provided is financial guidance and should not be considered financial advice.