Experts warn of ‘terrifying’ lack of understanding of cryptocurrency risks as popularity soars

The number of people who own cryptoassets like Bitcoin has jumped by a quarter to 2.3 million over the past year, according to a poll, but experts have expressed concerns about a “terrifying” lack of knowledge of the risks involved.

A survey by the Financial Conduct Authority (FCA) found that while more people are aware of the existence of cryptocurrencies and other digital assets, understanding about what they are is in decline.

It found that 78 per cent of adults have heard of cryptoassets, up from 73 per cent a year ago.

However, of those people, just one in 10 have seen the FCA’s warnings that investors could lose all of their money.

Three in 10 people could not correctly identify the definition of a cryptocurrency from a selection of possible answers. One in 7 buyers of crypto said they borrowed money to fund the purchase and one in five said they were motivated by fear of missing out, or “FOMO”.

Cryptocurrencies are digital “coins” built on a decentralised database which records all transactions and is secured using complex codes, or cryptography. Because the database, known as a blockchain, is decentralised it does not need a single central organisation like a bank to process transactions.

Although the number of retailers accepting bitcoin, the most popular cryptocurrency, is growing, it remains far from widely used as a medium of exchange.

Andrew Bailey, the governor of the Bank of England, is one of a number of high-profile figures to have issued a warning about cryptocurrencies. This week he said the value of crypto assets is “highly unstable and could be nothing”.

Despite the warnings, cryptoassets are increasingly seen as a safe investment by the public. The FCA’s poll found that 38 per cent of those who had bought them believed they were taking a gamble, down from 47 per cent a year ago.

Enthusiasm for cryptoassets is also growing with over half of crypto users saying they have had a positive experience so far and are likely to buy more, rising from 41 per cent to 53 per cent.

Laith Khalaf, financial analyst at AJ Bell, said that while the research painted a “broadly positive” picture, some aspects of the findings were deeply concerning.

“There is a dark underbelly lurking in the figures, which suggests there is still potential for widespread consumer harm,” he said.

“The fact that 14 per cent of crypto buyers have borrowed to invest is simply terrifying.

“The extreme volatility and uncertain long-term outlook for crypto means holdings can be wiped out, leaving borrowers with nothing but their debt as a memento.”

FOMO is “never a good motivation for financial decisions”, Mr Khalaf added.

“Buying cryptocurrency is a dangerous financial activity and while many consumers appear to understand the risks, some are carelessly playing with fire.

“There is no clear path for cryptocurrency to achieve widespread acceptance as a means of exchange between consumers and businesses and the carbon footprint of crypto mining has further dented its credentials as a long-term alternative to the existing monetary system.”

Kevin Pratt, money expert at Forbes Advisor UK, said it was “disturbing” to read that one in eight consumers incorrectly think crypto investments are somehow protected by the regulator.

“You worry that, sooner or later, a lot of fingers are going to get badly burned, and not just because of fluctuations in the value of the assets,” Mr Pratt said.

“After all, fraudsters follow the money. But maybe the authorities need to accelerate their thinking about how to increase and improve the regulation of crypto and extend regulatory protection.

“If that’s not feasible due to the nature of crypto, then the warnings should become starker and more visible.”