A large chunk of Britons are staking some of their savings on dangerous and lawless cryptocurrency.
Some investment experts warn that the Bitcoin phenomenon carries all the hallmarks of a bubble about to burst — with inexperienced investors at risk of losing everything.
One in five UK adults have bought cryptocurrencies, according to exclusive research for Money Mail by Scottish Friendly.
Risky bet: Some investment experts warn that bitcoin phenomenon carries all the hallmarks of a bubble about to burst — with inexperienced investors at risk of losing everything
The mutual also found one in ten parents had bought cryptocurrency to save for their children’s future.
Meanwhile, research for Money Mail by DIY investing platform AJ Bell found that just 19 per cent say they understand how cryptocurrencies work, and nearly one in ten have already lost money after investing in lockdown.
Furthermore, one in four students have bought cryptocurrency and one in three plan to buy in the next three months, according to a survey of 24,000 by student deals site Unidays.
There are now more than 1,600 cryptocurrencies such as Bitcoin and Ethereum, and adverts urging people to invest can be seen all over the internet, as well as at train stations and on billboards across the country.
But City watchdog the Financial Conduct Authority (FCA) has repeatedly warned that those investing in volatile cryptocurrencies should be prepared to lose all of their money.
Cryptocurrency investment fraud also soared 57 per cent in 2020, with losses of at least £112 million.
Such investments are not regulated, so those whose money disappears cannot get compensation or complain to the Financial Ombudsman Service.
Yet despite the dangers, more and more Britons are now gambling on cryptocurrencies.
Just last week Premier League football team Wolverhampton Wanderers announced they will wear the name of a cryptocurrency exchange on their shirts next season.
It comes as the Bank of England revealed this week it is exploring creating its own digital currency.
But unlike Bitcoin and others, it would be linked to the value of the pound and backed by central bank reserves — meaning it would not swing wildly in value.
You shouldn’t invest money you can’t afford to lose
Darcey Croft lost nine Bitcoins when she forgot the password to her digital wallet
Mother-of-four Darcey Croft has lost nine Bitcoins that would now be worth around £225,000.
Darcey, 46, first bought five of the cryptocurrency coins in 2012 for £30 each, but the Japanese company she used was hacked and she lost them all.
A few years later she bought four more for a similar price, but forgot the password to her digital wallet and was then permanently locked out of her account.
Darcey, who lives in Beaconsfield, Buckinghamshire, invested in cryptocurrencies again last year and saw her £15,000 soar to more than £70,000, before it plummeted to £35,000 last month.
It is now worth around £40,000.
Darcey, who runs lifestyle and wellness firm barenaturals.com, says she will hold on to her cryptocurrencies — even if that means she loses it all.
But she says: ‘I would never advise somebody to invest in it.
‘It is like gambling, you shouldn’t invest money you can’t afford to lose.
‘It can go down, but if it goes up it can go up very quickly.’
Is crypto worth the risk?
Cryptocurrency is virtual money stored and secured using computer technology. Critics have long argued that it has no intrinsic value — unlike a company you can buy shares in, or even gold, which despite similarly trading on sentiment is a store of value that goes back thousands of years and does have some practical and ornamental uses.
As a result, those who risk their money on it are finding they can lose thousands simply because of what tech entrepreneur Elon Musk writes on social media.
The Tesla founder helped send Bitcoin to record heights earlier this year after his firm bought $1.5 billion of it.
But last week he sent the value plummeting by almost 5 per cent after suggesting on Twitter he had broken ties with it.
Yesterday the price fell a further 10 per cent after former U.S. president Donald Trump said Bitcoin was a scam and Denmark announced a crackdown on crypto traders.
Tesla founder Elon Musk sent the value plummeting close to 5 per cent last week after suggesting on Twitter that he had broken ties with it
Economics commentator Frances Coppola says: ‘People are putting real money into it and they are assuming that will make some money and they will be able to get it out.
‘There really is nothing holding the value of crypto at all. It’s really held up by the faith of its community. As long as people believe in it, it will survive.’
The price of Bitcoin soared in 2020 from about £5,000 to peak at around £47,240 in April this year. But it has since lost half of its value having crashed down to around £23,000 yesterday.
A £10,000 investment in Bitcoin at its peak on April 14 would now be worth less than £5,000.
Bitcoin’s price rocketed in 2020 and early 2021 but after hitting a peak in mid-April it has dived
Beware FOMO and the bitcoin winner stories
Investors have been lured into buying cryptocurrencies after hearing staggering success stories — from people who’ve paid for luxury holidays with their gains to those who have got on the property ladder with profits made from trading Bitcoin.
But investment experts say cryptocurrencies are overpriced and will inevitably crash — leaving those holding it to suffer devastating losses.
Bitcoin and ethereum
Bitcoin rose from $29,334 at the start of the year to a peak of $64,829, but has tumbled to $34,195, according to Coindesk.
Rival cryptocurrency Ethereum went from $977 at the start of 2021 to a peak of $4,383 but has slide back to $2,514.
Neil Lovatt, commercial director at Scottish Friendly, says he is seeing the same behaviour he saw before the dotcom bubble burst in the early 2000s.
He says: ‘No one ever talks about the losers. It’s all part of a bubble culture and everyone obsesses over the winners, the focus is all on the wrong place. It is a classic example of a bubble.
‘Crypto is valuable only because other people think it is valuable. Everyone has a very good convincing, long-term economic argument. Eventually something happens to bring people back down to earth.
‘There are more than enough historical examples of this happening in generation after generation and this is no different. Crypto is going to burn a lot of people.
‘A lot of people are going to lose out and badly.’
And he adds: ‘The thought of someone putting money that matters to their future into cryptocurrency absolutely petrifies me.’
As addictive as gambling?
The uncertainty and extremes of the value of cryptocurrency mean many think investing in it is no different to gambling.
Specialist rehab centre Castle Craig in Scotland has treated close to 100 people now for addiction to trading in cryptocurrency.
Therapist Tony Marini says those susceptible to addiction could easily be lured by the highs and lows of cryptocurrency trading.
He says one client he treated lost £17 million over five years.
He says: ‘I had somebody who could not put his phone down for ten seconds. When his wife tried to take his phone off him he started sweating and shaking.
‘It is exactly the same as what a normal gambler goes through. When someone crosses the line into addiction, you cannot go back.’
A spokesman for gambling support charity GamCare says: ‘Trading sites are increasingly popular and accessible.
Those who have struggled to control their gambling may be vulnerable to harm, especially if they are not able to fully assess the risks or how volatile markets can be.’
Is history repeating itself?
An investment bubble occurs when an asset quickly soars well above its intrinsic value.
When investors realise this, the bubble bursts and the value plummets. Here, Money Mail shows how history repeats itself…
Dutch Tulips: In one of the earliest examples of a bubble, the price of tulips soared twentyfold in Holland in the 1630s, meaning a bulb was worth more than a house.
Prices plummeted 99 per cent just three months later.
South Sea Company: After stories circulated of the riches in South America, shares in the company that had exclusive rights to trade with the Spanish colonies soared in value and were quickly snapped up.
Shares rose from £128 to £1,050 over six months in 1720 before collapsing.
Japanese property and stocks: In the 1980s, the Japanese government tried to counter a recession with fiscal stimulus packages.
As a result, stocks and urban land values tripled within four years before the bubble burst in 1991 — triggering the ‘Lost Decade’.
Dotcom: The internet boom of the 1990s triggered a huge wave of speculation in new tech businesses — meaning hundreds of firms received multi-billion dollar valuations.
The U.S. Nasdaq Composite Index rose from just shy of 500 in 1990 to peak at over 5,000 in 2000. The index then crashed 80 per cent by late 2002.
Crypto investing is tempting the young the most
AJ Bell’s research for Money Mail also found that young men were most likely to be tempted by cryptocurrency.
The survey found one in ten men had invested in the past year, compared to one in 20 women. It also revealed that 15 per cent of 18- to 24-year-olds and 12 per cent of 25- to 34-year-olds have bought digital money in lockdown.
Danni Hewson, financial analyst at AJ Bell, says cryptocurrencies are at risk of damaging a generation of young investors who might not have the financial resilience and experience of their elders.
She says: ‘Cryptos are relatively new, volatile and fashionable which is probably why they are significantly more popular with younger generations.
‘Older generations have experienced the vagaries of the stock market, they’ve lost money during the financial crisis and possibly the dotcom crash before that, so they’re more wary of cryptos. Twice shy definitely applies here.
‘While there is clearly money to be made, there’s plenty to be lost and no one should be betting more than they can stand to lose, because right now the crypto world is rather like a game of roulette.’
City watchdog the Financial Conduct Authority has repeatedly warned that those investing in volatile cryptocurrencies should be prepared to lose all of their money
Bitcoin and crypto can be a hotbed for crime
There are increasing concerns about criminals using cryptocurrency to launder money. As a result, banks and governments are taking action.
Police are currently unable to freeze cryptocurrency assets of criminals in the way they can with ordinary bank accounts.
And the FCA said last week that many cryptocurrency firms were not meeting their standards for anti-money laundering.
International bank HSBC has said it does not deal with unregulated cryptocurrencies, while some other banks have reportedly begun to suspend payments to cryptocurrency exchanges over crime concerns.
Turkey has already banned the use of cryptocurrency in payment transactions, and China has also launched a crackdown. Yet global investment banks Goldman Sachs and JP Morgan are among those to open up to cryptocurrency trading.
Of course there are always success stories that encourage others into what many regard as little more than a pyramid scheme.
After the Covid crash, Bitcoin fell to less than $5,000, so if you bought then, and sold at around $60,000 a year later you would have increased your take more than tenfold. But few will have had the nous to do that.
The bitcoin winners who bought in the crash or got in early
Money Mail reader Graham Snell, 41, says he has been able to retire in New Zealand after investing heavily in cryptocurrencies and stocks when coronavirus crashed the markets.
The former equity analyst inherited £165,000 from his grandmother and sold his house — put £135,000 in cryptocurrencies and £190,000 in stocks and shares.
He says the stock market made him £140,000, while the cryptocurrencies made him £330,000 profit.
But he admits stories like this could be dangerous. He says ‘It was a bit of a gamble, but it was a gamble I was prepared to take and it was a gamble based on really researching what was happening in crypto.
‘Amateur investors should tread really carefully. Only invest what you are prepared to lose.
‘It is a new industry and it could be regulated out of existence.’
He says that HSBC closed his account after he moved money in and out of the cryptocurrency exchange Kraken.
Meanwhile, earlier this year This is Money reader and podcast listener Chris Sedgwick, from Yorkshire, told how he had turned a £2,000 bitcoin investment in 2015 into £75,000, a third of which he has banked.
‘Not all people who got into bitcoin early now drive Lamborghinis and live on private islands’, he told This is Money.
‘Some people, like me, invested a modest amount and have done sensible things like buying boring cars and overpaying the mortgage.’
Bitcoin and energy worries
A major concern about the future of cryptocurrency is the sheer amount of energy needed to process, or ‘mine’, new Bitcoins, and compute transactions. The computer processing involves a huge drain on energy.
Bitcoin alone uses more electricity a year than the whole of Argentina, a study by Cambridge University found. Iran last month has announced a four-month ban on the process after some cities suffered blackouts.
Critics say the environmental damage caused by cryptocurrency is another reason the boom is simply unsustainable.
Baroness (Ros) Altmann, a consumer campaigner, says: ‘Cryptos involve massive climate damage with computing power, microchips and energy being consumed to generate something that is purely speculative.’
She adds: ‘I just cannot see any social value in cryptocurrrencies like Bitcoin. There are huge societal downsides and the only upside seems to be to enable people to make speculative profits and losses.
‘All the risks of environmental damage, fraud, scammers, gambling addiction, criminal activity, money laundering seem to be sanctioned, and for what?’
The computer processing needed to ‘mine’ cryptocurrency involves a huge drain on energy. Bitcoin alone uses more electricity a year than the whole of Argentina
Return hungry investors are easy prey for fraudsters
The confusion and complexity of cryptocurrencies and lack of regulation mean investors are easy prey for fraudsters.
It is understood that High Street banks are urgently looking at ways to stop more money being lost to cryptocurrency-related scams.
Figures from Action Fraud show that last year reports of cryptocurrency investment scams surged 57 per cent to 5,581.
In January alone there were 720 reports totalling £14.3 million stolen — roughly 23 a day, at an average loss of £20,000.
NatWest has recently set up an alert on its online banking site to warn customers of the threat.
A spokesman adds: ‘We have prevented millions of pounds from being sent to crypto-criminals in the past six months.’
Meanwhile, Ashley Hart, head of fraud at TSB, says: ‘Crypto platforms urgently need greater regulation.
‘Anyone approached to invest in crypto should be extremely wary as these approaches are overwhelmingly scams.’
A spokesman for banking trade body UK Finance says: ‘Criminals are experts at impersonating trusted organisations such as investment and cryptocurrency firms, using fake websites and social media posts supposedly endorsed by celebrities to target their victims.
‘Customers should be cautious of approaches offering exclusive investment opportunities and check the FCA register before taking any action.’