FCA warns on cryptocurrency

Laith Khalaf
11 January 2021

•    The FCA has issued a warning to retail consumers on investing in cryptoassets
•    The regulator appears concerned that unregulated firms are targeting consumers with marketing that promises high returns, that there may be some scam activity, and that consumers might not fully understand the risks associated with cryptoassets
•    The warning follows hot on the heels of the FCA ban on derivatives and ETNs linked to cryptocurrencies, which came into effect on 6th Jan 2021
•    Bitcoin is now trading at around $34,400*, down 17% from the $41,500 peak it reached on 8th January, just three days ago

*source: Coindesk, 8am 11th Jan 2021

Laith Khalaf, financial analyst at AJ Bell:

“The idea of getting rich quick is as dangerous as it is attractive and anyone who invests in crypto currencies should be prepared to lose their shirt, or a considerable portion of it. 

“The regulator is clearly concerned that the high risks already inherent in cryptoassets are being compounded by scam activity, as well as unregulated firms targeting consumers with marketing material that highlights the rewards, but not the potential downside, of investing in cryptoassets. You can see how the rapid price appreciation of Bitcoin, combined with aggressive marketing and low interest rates on cash, creates a perfect storm for consumers looking to get a decent return on their money.

“Unfortunately Bitcoin and other cryptoassets are subject to dramatic price falls as well as rises. Consumers should be on high alert for unsolicited communications linked to Bitcoin or other crypto currencies and should consider any marketing material with an extremely critical eye. They should also make sure any firm they are dealing with is regulated, or at least has temporary permissions from the regulator.

“Irrespective of what you think the future for cryptocurrencies might be, there’s no denying that they are highly volatile and therefore sit at the precarious end of the risk spectrum. Products that are linked to cryptocurrencies might also be complex and hard to understand, further muddying the waters. Consumers probably can’t fall back on the Financial Services Compensation Scheme if things go wrong either.

“Much has been made of the fact that Ruffer, an investment company known for its conservative investment style, recently invested in Bitcoin for the first time. However, it’s important to note that the investment manager only invested around 2.5% of a portfolio that is otherwise invested in more traditional assets. Even if things go wrong in the cryptomarket, they have protection in their other investments.

“The fear is that consumers are leapfrogging stocks and bonds and going straight from cash to Bitcoin, in the mistaken belief it’s much the same. Buying Bitcoin and other cryptocurrencies should be something you do with money you are prepared to lose and after you have already built up a sizeable portfolio. If you haven’t got a stocks and shares ISA, then you should seriously stop and consider whether you should be investing in Bitcoin.”

Laith Khalaf
Head of Investment Analysis

Laith Khalaf started his career in 2001, after studying philosophy at Cambridge University. He’s worked in a variety of roles across pensions and investments, covering both the DIY and the advised sides of the business. In 2007, he began to focus on research and analysis, and has since become a leading industry commentator, as well as a regular contributor to the financial pages of the national press. He’s a frequent guest on TV and radio, and for several years provided daily business bulletins on LBC.

Contact details

Mobile: 07936 963 267
Email: laith.khalaf@ajbell.co.uk

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