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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 crypto assets 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 crypto assets.
The crypto asset market is largely unregulated. There is a risk of losing money or any crypto assets 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 here.
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 crypto assets can be easily sold at any given time. The ability to sell a crypto asset 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 crypto assets at the time you want.
4. Crypto asset investments can be complex
Investments in crypto assets 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 perform well.
A good rule of thumb is not to invest more than 10% of your money in high-risk investments.
https://www.fca.org.uk/investsmart/5-questions-ask-you-invest
6. Asset-Specific Risks
Stablecoins
These assets are susceptible to collateral mismanagement, depegging from their intended value, and may be subject to regulatory scrutiny. Stablecoins may not be guaranteed to maintain a fixed value during periods of extreme market volatility.
Meme Tokens
These tokens are often highly speculative and can experience extreme price volatility. Their value may be driven largely by market sentiment, social media trends, or promotional activity rather than underlying fundamentals. Many meme tokens have limited use cases, may be issued by anonymous teams, and can be vulnerable to market manipulation, liquidity shortages, or sudden loss of value. Investors may face a heightened risk of significant and rapid financial loss.
DeFi Tokens
The reliance on smart contracts exposes DeFi projects to vulnerabilities and losses. Additionally, liquidity risks and governance manipulation can adversely affect the value and usability of these tokens.
Utility Tokens
Investors must navigate regulatory uncertainty, market demand fluctuations, project failure risks, and dependence on the success of the underlying platform. The viability of these tokens can be heavily influenced by external factors and market sentiment.
Staked Tokens
Staked assets are vulnerable to slashing, limited liquidity, validator failures, and unpredictable rewards. These factors contribute to the overall risk profile associated with staking in various protocols.
7. How to Protect Yourself
If you are interested in learning more about how to protect yourself when investing in high-risk products, visit the FCA’s website here.
8. Further Information
For further information about cryptoassets, visit the FCA’s website here.