While Bitcoin (BTCUSD) is being favored by institutional investors, prices of crypto are on a tear. Meanwhile, the Financial Conduct Authority (FCA) in the U.K. is not sure whether cryptoassets can be categorized as a safe investment or not.
The agency, which is in charge of overseeing all the financial markets based in the United Kingdom, has taken to warn consumers that if they continue to invest in cryptocurrencies or any investments linked to them, they could suffer substantial financial losses. The FCA clarified on its website that when an investor puts their funds in buying cryptoassests, or any related investments, they are generally taking very high risks.
In the past month, crypto and Bitcoin prices have reached new heights, as they are now receiving renewed attention. Institutional investors are also giving positive statements about the potential of these digital currencies, which has gained them even further attention. Reports have also stated that retail investors are readily investing in cryptocurrencies, in order to benefit from the rally.
The Risks Associated with Investing in Cryptocurrency
The FCA took to outlining at least five risks that consumers will have to bear, if they invest in cryptocurrencies.
First and foremost, cryptocurrencies have an unregulated status, which means that consumers are not adequately protected against those investments that are advertising greater returns for the chosen asset class. In addition, consumers will be taking on a greater risk because of the price volatility of cryptocurrencies.
Thirdly, there are numerous technical underpinnings associated with cryptocurrencies, which make related investment risks and concepts difficult to comprehend for laymen. The agency informed that there is no guarantee that cryptoassets can later on be converted into cash once again.
The FCA further warned investors there is a possibility of high fees and charges, if they are to invest in cryptocurrency. As per the agency, this is mainly due to the fact that there is no regulation where cryptocurrency is concerned. Lastly, the agency recommended that investors should be wary of the returns from crypto products. It believes that firms may decide to undertake all the risks that are associated with investing in these virtual currencies.
The agency has issued warnings against investments in cryptocurrencies before as well. During the bull run in the year 2017, the FCA made it clear that it was strongly against online trading scams and initial coin offerings (ICOs) that involve cryptocurrencies.
The agency stated that ICOs are speculative and very high-risk investments. They warned investors to be mindful of the decisions they are making and be mentally prepared to lose all of their stake. It also encouraged banks to keep an eye on all clients involved in crypto activities and take strict action against them.
The Regulatory Status of the Market
The warnings, time and time again, being given by FCA are a reminder that crypto markets are inherently unstable. However, it cannot be denied that there have been a number of improvements in their liquidity and infrastructure.
A financial analyst working with AJ Bell, Laith Khalaf, said that the actions of the regulators were triggered by the concerns of the people. The high risks that run rampant in cryptoassests are being compounded by unregulated firms and scam activity. The former makes sure to target consumers with material that markets and highlights the rewards, but does not bring to light the potential downside of investing in the crypto market.
Cryptocurrency prices undergo wild price swings, which often skyrocket or crash in double-digit values, all in a single day. Moreover, crypto markets are not very widely traded. Despite the fact that there is a hesitant vote of confidence from the investors in this market, the absence of appropriate regulations does not sit well in this emerging ecosystem.
The FCA has urged investors to make sure that the crypto investment firm they are talking to is registered with the agency. Just last year in December, it established a temporary registration regime for crypto trading firms. Moreover, in case that a firm is not registered with the agency, it is advised that investors pull out their money or cryptoassets immediately.