The number of investors holding crypto assets is on the rise. Yet, research also indicates that some of those investing savings in cryptocurrency aren’t fully aware of what the asset is or the risk it presents.
Whether you’ve considered investing in cryptocurrency or not, it’s essential that you understand your investments and the associated risks. This allows you to ensure they align with your goals and risk profile.
The rise of crypto assets
There are thousands of crypto assets available, and they’re often referred to as cryptocurrencies. The most commonly known is Bitcoin, but others include Litecoin, Ripple, Ether and Ethereum. They use a peer-to-peer system and exist electronically. That means there is no central bank or government in control or to step in if something goes wrong, leading to significant risks.
Crypto investors often invest in these cryptocurrencies in the hope they will rise in value. However, compared to traditional assets, they are considered extremely high-risk and volatile.
Despite this, the Financial Conduct Authority (FCA) now estimates 2.6 million UK consumers have brought crypto assets at some point. That’s a rise of 1.1 million in just a year.
The FCA notes: “Many [cryptocurrencies] are not currently regulated in the UK. This means that the transfer, purchase and sale of such tokens currently fall outside our regulatory remit, leaving customers unable to make complaints to the Financial Ombudsmen Service or seek protection from the Financial Services Compensation Scheme.”
While many crypto assets owners understand the product, an FCA poll found a worrying amount do not. An estimated 300,000 people invested in cryptocurrencies wrongly believe they have protection, for example.
What’s more, a third of cryptocurrency investors said an advert made them more likely to purchase the asset. It indicates that adverts are influencing decisions and could suggest some aren’t fully comprehending the risks and how it relates to their finances before investing. This could leave some exposed to higher risk and volatility than is appropriate.
The importance of understanding your investments
The research on cryptocurrencies is a timely reminder that it’s essential to understand what you’re investing in. This applies to all investments. Here are seven reasons to highlight why it’s important:
1. Align investments with your goals
When you start investing, you probably have a goal in mind. Maybe you hope to be able to retire early or you’re building a nest egg for grandchildren. Your goals play a role in the investments that are appropriate for you based on the time frame, your priorities and the other assets you have to achieve them. As a result, you need to understand how different investments could help you towards these.
2. Understand the risk
All investments carry some risk, however, different assets and investments vary hugely when it comes to risk. We’ve already mentioned that cryptocurrencies are higher risk than traditional assets. For most investors, crypto assets don’t match their risk profile. It’s important you understand how much risk is involved when investing your capital.
3. Prepare for expected volatility
Volatility refers to how much the value of your assets rises and falls over the short-term. Typically, higher-risk investments will experience more volatility. Being prepared for the expected level of volatility can help you stick to your long-term plan even when the value may fall rapidly. It also highlights when a longer view is needed when assessing where to invest.
4. Understand if your investments are protected
The cryptocurrency research highlighted how thousands of people invested in these assets wrongly believe they’re protected. It’s essential that you understand what level of risk you’re taking when investing and where protection may cover you. Believing you have protection, when you don’t, can lead to you taking inappropriate risks that you otherwise would have avoided. You should also review whether products are regulated.
5. Seek out opportunities that suit your goals
By taking the time to learn more about investment opportunities, you can see how they align with your goals. For some, high-risk investments may be suitable, but for others a more cautious approach is appropriate. Always bring investment opportunities back to your wider financial plans and aspirations to put them into context.
6. Have confidence in your finances
Having a deeper understanding of your investments puts you in control and provides confidence. Understanding how the investment may perform and the risk involved can provide confidence by allowing you to take additional steps to protect your aims if necessary.
7. Reduce the risk of falling victim to scams
Finally, scammers often use a lack of understanding to their advantage, such as claiming they can help you access a pension early or proposing unusual investment opportunities. Having confidence in your knowledge means you’re more likely to spot the red flags if you’re being targeted by a fraudster. Taking the time to understand financial decisions means you’re in a better position. Criminals will typically want you to make a snap decision without fully thinking through your options.
If you’d like to discuss investment options, whether an existing portfolio or potential opportunities, please get in touch. We’re happy to explain different investment options to you and how they relate to your wider financial goals.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.