More than a third of people who have bought cryptocurrency admit they had a poor or non-existent understanding of the sector when they first invested in it, according to a survey by behavioural finance experts Oxford Risk.
What did the research find?
Oxford Risk conducted the survey across 1,038 respondents between 21-23 May 2021 to determine the extent Brits understand and use cryptocurrency.
The most concerning data from the survey revealed that 36% of UK cryptocurrency investors admit their understanding of the sector was either “non-existent” or “poor” when they first bought cryptocurrency. Even after having owned cryptocurrencies, 21% of investors still rated their knowledge as equally bad, demonstrating how persistent the confusion surrounding cryptocurrency is.
Perhaps owing to this lack of understanding, 81% of respondents said they had started with small cryptocurrency investments to "see what would happen". Most investors limited their exposure to the sector, with 76% investing less than 5% of their savings, and 41% investing less than 1% of their savings in cryptocurrencies. However, 1 in 10 crypto traders admitted they have more than 10% of their savings invested, with a further 7% staking more than 20% of their total assets on cryptocurrency.
The main drive behind investing in cryptocurrency appears to come from reports of rocketing prices. 35% of respondents said they had read widely about climbing crypto prices before making a purchase, while 15% said they had been encouraged to invest in the sector by their friends or family. However, a large proportion are unsure what the future holds for crypto, with 45% responding that they did not know whether there will be continued price appreciation, 32% unconvinced there will be, and only 24% being certain there will be.
According to a recent study by the Financial Conduct Authority (FCA), an estimated 2.3 million adults in the UK held cryptocurrency assets as of June 2021, up from 1.9 million last year. The research also found that median crypto holdings had risen to £300, up from £260 in 2020. Thanks to the widespread media coverage of the sector, 78% of British adults now say they have heard of crypto, up from 73% in 2020. 21% of respondents plan to either buy cryptocurrency for the first time this year or increase their current holdings.
What you need to know before you invest in cryptocurrency
Cryptocurrencies are an extremely volatile asset, meaning there is a significant risk to your capital, so you should make sure that you know what you are investing your money in before you commit.
Understand how cryptocurrency works
The first step to becoming a responsible cryptocurrency investor is to understand what they are and how they work, so that you can be best prepared for the ups and downs that come with the sector. Cryptocurrencies are a brand-new phenomenon in the world of finance and, with minimal regulatory framework, they can be a dangerous combination of confusing and high-risk. To begin prepping for your first cryptocurrency purchase - or if you need to brush up on your existing knowledge - browse our beginner's guide to investing in cryptocurrency.
Pick a cryptocurrency exchange to purchase from
Before you buy your first cryptocurrency, you will need to select an exchange platform to make your purchase with. There are myriad options for UK investors, but regardless of which exchange you choose, note that cryptocurrencies are not covered by the Financial Services Compensation Scheme (FSCS) - which means that, no matter where you get your crypto from or how much you own, your money is not protected should anything happen.
A small number of exchanges are registered or currently pending registration with the FCA in order to be permitted to legally trade in the UK, and for the purpose of anti-money laundering and terrorism financing regulations only, but ultimately consumers have no protection for their assets whether they use an FCA-approved exchange or not. The UK government and the FCA are in the process of developing further legislation to improve the security of the growing cryptocurrency sector, but for the time being, UK investors can freely access the vast majority of exchange platforms - just bear in mind that your assets are not protected.
The list of cryptocurrency exchange platforms with FCA approval to trade in the UK can be found on its website's Registered Cryptoasset Firms page. Firms permitted to trade in the UK while awaiting approval can be found on the FCA's list of Cryptoasset firms with Temporary Registration.
Decide how you are going to store your cryptocurrency
When you purchase cryptocurrency, you will need somewhere to store the "keys" which give you access to your assets. Without them, you cannot access your cryptocurrency, rendering your holdings useless - so your wallet is absolutely crucial to your crypto investment.
There are a number of different types of crypto wallet, and each has its own unique attributes which work best for different scenarios; A beginner cryptocurrency investor may find the integrated "hot" wallet on their chosen exchange platform to be most convenient for them, but a more advanced investor with a large amount of cryptocurrency may find the added security of a "cold" offline wallet gives them more peace of mind. Check out our article "What is a cryptocurrency wallet?" to find out more about the different kinds of digital wallet and which one would work best for your unique circumstances.
Keep your investment portfolio diverse
Due to the volatile nature of cryptocurrency, it is wise to limit your exposure so that you do not risk a large proportion of your portfolio in a sector so vulnerable to dramatic peaks and troughs over a short period of time. Make sure to read our beginner's guide to investing to ensure that you are in the right position to be investing in the first place.