Don't invest unless you're prepared to lose all the money you invest. This is a high-risk investment and you should not expect to be protected if something goes wrong. Take 2 mins to learn more.
Estimated reading time: 2 min
Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.
What are the key risks?
1. You could lose all the money you invest
The performance of most cryptoassets can be highly volatile, with their value dropping as quickly as it can rise. You should be prepared to lose all the money you invest in cryptoassets.
The cryptoasset market is largely unregulated. There is a risk of losing money or any cryptoassets you purchase due to risks such as cyber-attacks, financial crime and firm failure.
2. You should not expect to be protected if something goes wrong
The Financial Services Compensation Scheme (FSCS) doesn't protect this type of investment because it's not a 'specified investment' under the UK regulatory regime – in other words, this type of investment isn't recognised as the sort of investment that the FSCS can protect. Learn more by using the FSCS investment protection checker.
The Financial Ombudsman Service (FOS) will not be able to consider complaints related to this firm or Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA regulated firm, FOS may be able to consider it. Learn more about FOS protection here.
3. You may not be able to sell your investment when you want to
There is no guarantee that investments in cryptoassets can be easily sold at any given time. The ability to sell a cryptoasset depends on various factors, including the supply and demand in the market at that time.
Operational failings such as technology outages, cyber-attacks and comingling of funds could cause unwanted delay and you may be unable to sell your cryptoassets at the time you want.
4. Cryptoasset investments can be complex
Investments in cryptoassets can be complex, making it difficult to understand the risks associated with the investment.
You should do your own research before investing. If something sounds too good to be true, it probably is.
5. Don't put all your eggs in one basket
Putting all your money into a single type of investment is risky. Spreading your money across different investments makes you less dependent on any one to do well.
A good rule of thumb is not to invest more than 10% of your money in high-risk investments.
If you are interested in learning more about how to protect yourself, visit the FCA's website here.
For further information about cryptoassets, visit the FCA's website here.
With all of the different types of cryptocurrency and terms floating around, the world of cryptocurrency can be easy to get lost in. One of the terms that pops up quite frequently is fiat currency — what are people talking about when they use this term?
What is fiat currency?
Fiat currency is a form of money that’s issued by a government and declared to be legal tender. This type of currency is not linked to any asset of value and can be printed at will by central governments. However, governments must be careful to avoid over-circulation, as this would cause a drop in value.
What determines the value of fiat money?
The value of the currency is based on what it can be used for, not because the coins or cash have any particular value. It’s money that can be used because it’s based on a trust relationship between the issuer, the holder and those that receive it — in turn the supply and demand can be loosely regulated by the government and market.
If trust in the value of a currency is lost, it will lose demand which will lead to a drop in value. The trust of currency is ultimately based on members of the economy believing it’s worth something. The value of fiat money isn’t directly held in a physical asset like a precious metal or an item that’s of use to someone.
For example, when the government of Zimbabwe started issuing more money, the situation eventually snowballed into one where no-one trusted the value of the currency — so, it collapsed as a form of fiat currency.
What can fiat money be used for?
Fiat money is widely accepted all over the world to buy almost any good or service. Fiat currency can come in the form of paper money, coins, credit, loans or bonds. If you apply for a credit card or personal loan and are approved, that credit or amount of money you receive is a form of fiat money because you’re essentially using money on the basis of your creditworthiness and agreement that you’ll pay back the funds — typically with interest.
Fiat money can also be useful for exchanging currency when you’re going on vacation, traveling or sending money around the world. International money transfer services allow people all over the world to take one form of fiat money and send it in the form of a different type of fiat currency for a small fee.
What are the pros and cons of fiat currency
One of the advantages that fiat currency has is that it’s the most accepted form of currency. It’s supported by multiple payments networks and currency exchanges around the world. Fiat money can also help stabilise a country’s economy for two reasons: governments control the money supply and it isn’t based off of a volatile commodity.
But that can also be a disadvantage because if too much money is printed, the currency could experience hyperinflation — severely dropping the value. It could be argued that fiat money has other disadvantages as well. Because fiat money has to continually be printed to keep up with demand and circulation, the value will likely drop over a longer period of time.
Fiat currency vs. cryptocurrency
Here are some of the key differences between fiat currency and cryptocurrency to help you unblur the lines a bit:
Fiat currency
Cryptocurrency
Physical or credit currency
Digital currency
Unlimited supply
Limited supply
Centralised
Decentralised
Government issued
Computer produced
Can come with interest
No interest at all
Government regulation and market control value
Supply and demand control value
At the moment, cryptocurrencies are still evolving and differ from fiat currencies in several ways. Firstly, they’re not minted into physical coins or banknotes. Also, they’re not issued by central governments. This is why many regulators aren’t seeing it as a legitimate currency.
At the moment, the number of exchanges of cryptocurrencies for physical goods and services has been limited, although that appears to be slowly changing with time.
*Cryptocurrencies aren't regulated in the UK and there's no protection from the Financial Ombudsman or the Financial Services Compensation Scheme. Your capital is at risk. Capital gains tax on profits may apply.
Cryptocurrencies are speculative and investing in them involves significant risks - they're highly volatile, vulnerable to hacking and sensitive to secondary activity. The value of investments can fall as well as rise and you may get back less than you invested. Past performance is no guarantee of future results. This content shouldn't be interpreted as a recommendation to invest. Before you invest, you should get advice and decide whether the potential return outweighs the risks. Finder, or the author, may have holdings in the cryptocurrencies discussed.
Anthony Caruana is an experienced technology professional and writer with a career spanning over two decades. His work has appeared in Lifehacker, CSO, Which-50, Macworld and many other publications. He's especially interested in the way tech and humans work with and against each other.
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