Thinking of dabbling in cryptocurrency? Please read our cautionary advice before you commit
Why are we writing an article about bitcoin & Cryptocurrency?
In the last year we have seen a notable rise in investments into cryptocurrency by students, with some students investing a large proportion if not all of their termly Maintenance Loan.
As with all investments we would advise you to only invest what you can afford after you have met your essential expenditures. However with bitcoin and cryptocurrency in particular, the general advice is to steer clear or only dabble with money that you can afford to lose!
Here are some of the reasons why..
Bitcoin is at the (very) “high-risk” end of the investment spectrum
The Financial Conduct Authority (FCA) have warned that investors ‘should be prepared to lose all their money’ if the value of their investment collapses, since cryptocurrencies are not covered by investment regulation or protection in almost every country so if a currency goes bust you have lost all your money, leaving you more ‘broke’ than ‘broker’.
Price of cryptocurrencies is volatile
Media attention, investments by finance firms, and comparisons between bitcoin and gold have all recently influenced the price of the cryptocurrency, with it’s value surging to around £40,000 in recent months.
However the latest comments by Elon Musk and decisions by Tesla to stop accepting crypto payments for their products as well as China further cracking down on digital currency, has made the value of bitcoin and other crypto currency plummet in the last couple of weeks.
Inflated or false promises of high returns
Cryptocurrency firms may also be overstating how much investors could receive from investing in crypto, while minimising the risks.
Traders offering Margin / Leveraged Funds
Various platforms such as Etoro use this strategy where they allow you to invest a smaller ratio of money say £1,000 which then allows you to borrow and invest 10 times as much bitcoin, in this case £10,000 worth. This deal sounds amazing, but, if the investment goes the wrong way you can lose everything you invested as well as owing the amount you borrowed or leveraged against your initial investment!
There are thousands of bitcoin investment scams going on today with scammers cashing in on the crypto buzz and luring people into bogus investments opportunities. Since October 2020, people age 20 to 49 were over five times more likely to report losing money on cryptocurrency investment scams than older age groups. The numbers are especially striking for people in their 20s and 30s: this group reported losing far more money on investment scams than on any other type of fraud and more than half of their reported investment scam losses were in cryptocurrency.
Look out for “celebrity scams”, of opportunities supposedly sponsored by celebrities or ‘romance scams’ through online dating sites. Essentially any promises of guaranteed huge returns or claims that your cryptocurrency will be multiplied are always scams.
Barriers to accessing money due to technical issues
Be warned of money transfers from bitcoin back to cash.
Whilst the registration of bitcoin at the blockchain level is very safe and considered to be unhackable, the transfer from bitcoin back to normal cash (fiat money) in your bank account is vulnerable to be targeted by hackers. Investors who have not been aware of the processes and safeguards required to do this securely, have been known to lose any gains they have made at this stage of the proceedings.
So there you have it – the brief tour of the pitfalls of investing in crypto currency.
We understand that digital currency is opinion dividing and could well have a fixed place in the future of finance however as students with a limited income, we can only recommend that you don’t invest money that is being diverted from essential expenses and that will leave you in financial difficulty to meet your daily costs if your investment is stolen, does not perform or cannot be accessed.
Please come and talk to the Student Advice team if you have got any financial concerns. We are certainly not crypto experts, but we will always do our best to help you find a way through.