Bitcoin and Ethereum are among the cryptocurrencies that have had a record-breaking year in 2021, but many investors don’t fully understand what they’re putting their money into, or the risks involved.
The price of Bitcoin reached an all-time high of more than $67,000 per Bitcoin towards the end last month, with Ethereum, the second-largest cryptocurrency after Bitcoin, also recording a record high of over $4,400 per ether. However, it’s been a very bumpy ride so far, so anyone considering investing in cryptocurrencies needs to be comfortable accepting huge volatility.
Worryingly, two out of five (36%) cryptocurrency investors in the UK admit their understanding of the sector was poor or non-existent when they first bought, according to research by behavioural finance experts Oxford Risk. Even after owning cryptocurrencies, 21% of investors still rate their knowledge of the assets and investment opportunities in the sector as poor or non-existent.
Greg Davies, head of behavioural finance at Oxford Risk said: “The concern is that too many people are buying blind without knowing what they’re doing and are being influenced to invest by rising prices and other people encouraging them to have a go. That is worrying if people have substantial amounts invested in cryptos and do not understand what they have bought.”
Even more concerned is that some people are borrowing money to invest in cryptocurrencies. A recent study by KIS Finance found that over two-thirds of cryptocurrency investors borrowed money to make their purchase, rather than using spare income or savings.
The city regulator the Financial Conduct Authority says it is worried that new investors are increasingly accessing higher-risk investments which may not be right for them, or reflect their risk tolerance.
Understanding cryptocurrencies – and their risks
Cryptocurrencies are extremely difficult for even experienced investors to get to grips with. They are created by a process known as ‘mining’, which involves using computers to solve highly complex algorithmic searches. Price movements can be highly volatile and are driven by lots of different factors such as speculation, demand and supply, and regulation.
For example, Bitcoin’s price surged following news that PayPal would allow its customers to buy, sell and hold cryptocurrency using their accounts with the company. It has since rolled out crypto services in the U.S. and the UK.
Holly Andrews, managing director at KIS Finance, said: “Cryptocurrencies are by no means a ‘safe’ investment as they are incredibly volatile and can see investors lose large percentages, if not all, of the money they put in very quickly. However, cryptocurrencies are becoming easier to trade and PayPal adopting the currencies onto their platform is a huge step forward for the industry and is likely to ignite an increase in the number of cryptocurrency traders.
“It’s important to remember, however, that you should only ever invest money that you can afford to lose, especially when it comes to something as unpredictable as cryptocurrencies. Consider getting professional financial advice before investing and never use credit facilities, such as credit cards or an overdraft, to fund your investments.”