What are the risks and rewards of investing in cryptocurrency?

Investments in cryptocurrency are becoming increasingly popular. Many such investments have been doing extremely well lately, with Bitcoin leading the way. The cryptocurrency market is at the cutting edge of financial technology and has created a real buzz, which is attracting both amateur and professional investors to spend billions of pounds each year. However, crypto investment can come with huge risks, which all investors should be aware of before looking to purchase cryptocurrencies.

In this article, Louise Bennett, a litigation solicitor who specialises in cryptocurrency at Keystone Law, provides an expert insight into both the rewards and risks associated with crypto investments.

A crucial starting point for all speculative investors is to be aware that unlike legal tender issued in England, cryptocurrencies are not backed by any government authority. This means the consumers cannot (at the present time) access any FCA compensation scheme for cryptocurrency losses due to fraud. Investors, therefore, need to be thorough with their due diligence as it is their responsibility to check the nature of all investments.

This is even more so in the current climate – fraud is on the rise, especially within the financial and banking sector, and cryptocurrency investments are ripe hunting ground for fraudsters who are making the most of its growing popularity and unregulated status.

Investors need to ensure they properly understand the investment they are making and carry out the appropriate due diligence on the scheme/end investment. The risk is entirely on the investors, with no formal protection in place if they take the wrong gamble. There has been a significant rise in crypto scams, with many wallets held on the blockchain being fed into scam companies, and the wallets emptied and stolen.

Financial institutions must maintain certain protection activities against money laundering and fraud, the transmission of funds, and more. New types of wallets are being released all the time, and while cryptocurrency exchanges are always improving their security measures, investors have so far not been able to fully eliminate the legal risks associated with owning cryptocurrencies, and it is likely that they never will.

Organisations are becoming more sophisticated with the services they can offer crypto holders. Digital assets are becoming increasingly popular amongst businesses, as well as individual investors, with many businesses now accepting collateral in the form of cryptocurrencies. The modern business world leans heavily on the success of the cryptocurrencies.

Will borrowers soon demand these types of service from their banks? The potential implications of cryptocurrencies are massive. The banking industry was historically resistant, in large part, to this technical disruption. However, that is beginning to change due to the development of blockchain technology.

As we are moving towards a world when we can buy products using cryptocurrency, this means that crypto holders may start using their crypto wallets on a blockchain platform to buy products, raise loans, use faster payments, etc., so it is more akin to a bank account. If anything, though, having this multifaceted platform in which to conduct a range of matters, only amplifies the need to protect investments.

The reality is that cryptocurrency is here to stay, and it is hugely successful. Banks need to prepare for a more permanent change towards this type of investment. However, given the risks involved, and the importance of our banking services for the economy, it is a move not to be taken lightly.