UK Risk Summary

Estimated reading time 2 min

Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.

What are the key risks?

1. You could lose all the money you invest

• The performance of most cryptoassets can be highly volatile, with their value dropping as quickly as it can rise. You should be prepared to lose all the money you invest in cryptoassets.
• The cryptoasset market is largely unregulated. There is a risk of losing money or any cryptoassets you purchase due to risks such as cyber-attacks, financial crime and firm failure.

2. You should not expect to be protected if something goes wrong

• The Financial Services Compensation Scheme (FSCS) doesn’t protect this type of investment because it’s not a ‘specified investment’ under the UK regulatory regime – in other words, this type of investment isn’t recognised as the sort of investment that the FSCS can protect. Learn more by using the FSCS investment protection checker here.
• The Financial Ombudsman Service (FOS) will not be able to consider complaints related to this firm. Learn more about FOS protection here.

3. You may not be able to sell your investment when you want to

• There is no guarantee that investments in cryptoassets can be easily sold at any given time. The ability to sell a cryptoasset depends on various factors, including the supply and demand in the market at that time.
• Operational failings such as technology outages, cyber-attacks and comingling of funds could cause unwanted delay and you may be unable to sell your cryptoassets at the time you want.

4. Cryptoasset investments can be complex

• Investments in cryptoassets can be complex, making it difficult to understand the risks associated with the investment.
• You should do your own research before investing. If something sounds too good to be true, it probably is.

5. Don’t put all your eggs in one basket

• Putting all your money into a single type of investment is risky. Spreading your money across different investments makes you less dependent on any one to do well.
• A good rule of thumb is not to invest more than 10% of your money in high-risk investments.

If you are interested in learning more about how to protect yourself, visit the FCA’s website here.

For further information about cryptoassets, visit the FCA’s website here.

Asset Category Overviews

Crypto-assets differ significantly in design, purpose, legal treatment, and risk exposure. Understanding these distinctions is essential for informed decision-making. The following summaries outline the principal risk considerations for major categories of digital assets.

Stablecoins

Stablecoins are crypto-assets whose value is pegged to fiat currency or other reserve assets.

• Counterparty risk: Third party may become insolvent or fail to maintain collateral.
• Redemption risk: May not be redeemable during market volatility.
• Collateral risk: Backing assets could decline in value.
• FX risk: Exposure to currency exchange rate movements.
• Algorithm risk: Stability mechanisms could fail catastrophically.

DeFi Tokens

DeFi tokens are crypto-assets linked to decentralized finance protocols built on blockchain technology.

• Smart contract risk: Coding errors can be exploited causing significant losses.
• Regulatory risk: New regulations may impact legality or value of protocols.
• Rug-pulls: Developers may abandon projects and withdraw funds.
• Oracle risk: External data manipulation can cause unintended outcomes.
• Complexity: Difficult for users to fully understand mechanisms and risks.

Wrapped Tokens

Wrapped tokens are tokenized representations of other crypto-assets created for cross-chain compatibility.

• Smart contract risk: Contract vulnerabilities could be exploited leading to loss of funds.
• Collateral risk: Mechanisms ensuring asset backing may fail.
• Custodial risk: Third party holding underlying assets may become insolvent or be hacked.
• Bridging risk: Technical issues may prevent transfers between blockchains.
• Pricing disparity: Price may diverge from underlying asset value.

Meme Coins

Community-driven, trend-based tokensMeme coins are crypto-assets whose value is driven primarily by community interest and online trends.

• Volatility risk: Extreme and unpredictable price fluctuations driven by social media and celebrity endorsements.
• Lack of utility: No intrinsic value or practical use case.
• Market manipulation: Susceptible to pump-and-dump schemes with artificial price inflation.
• Lack of transparency: Limited information on development teams and goals.
• Emotional investing: Strong reactions lead to impulsive, loss-amplifying decisions.

Staked Assets

Staked assets are crypto-assets locked on blockchain protocols to secure networks and earn rewards.

• Slashing risk: Network may penalize your validator for errors, causing loss of assets.
• Liquidity risk: Assets locked for extended periods cannot be accessed or sold quickly.
• APY not guaranteed: Reward rates are determined by protocols and fluctuate over time.
• Protocol risk: Network updates and changes may introduce new vulnerabilities or unforeseen outcomes.
• Smart contract risk: Vulnerabilities in staking contracts could be exploited, resulting in loss of staked funds or rewards.

If you are interested in learning more about how to protect yourself, visit the FCA’s website here.

For further information about cryptoassets, visit the FCA’s website here.