Do you know the risks of investing in cryptocurrencies?

More and more people decide to invest in crypto assets such as cryptocurrencies (Bitcoin, Ethereum, etc.), but many of these people are unaware of the risks. In fact, according to the British Financial Conduct Authority (FCA), 20% of crypto-asset owners assumed they had the same protection as traditional banking products. All of the above has meant that the governments of different countries are developing regulations to protect consumers and that various entities are warning them of the risks of investing in crypto assets. In this article, we want to tell you what those risks are so that, if you want to invest in these assets, you do so with more information and security.

Social networks and the internet allow everyone to have access to a lot of information and a large number of data and this is positive, however, when it comes to investing it is necessary to be especially cautious since there is a risk of losing all the money.

Along with all of the above, it is important to note that there are currently more than 17,000 different crypto assets, so it is important to choose correctly and they require a large energy consumption when mining activities, for example, so they have a high impact on the environment.

What are the main risks of investing in crypto assets?

The European Union has recently issued a statement highlighting some of the consumers’ risks when investing in crypto assets. The main risks are the following:

• Price fluctuations. One of the most outstanding characteristics of crypto assets is that they can suffer huge price fluctuations since they are based solely on the existing demand among consumers. This can mean that an investor could quickly lose all or even a large portion of his money.
• Unclear information. Sometimes the information related to crypto-assets is offered in a biased way since it only talks about the benefits that can be obtained, but the risks are not commented on. On the other hand, some social media influencers advertise crypto assets without offering all the necessary information to invest safely.
• Lack of transparency. How crypto-asset transactions are carried out is not usually transparent on some platforms. In addition to the above, due to the concentration in possession of crypto assets, prices and liquidity are sometimes affected, so if you want to sell the ones you own, it could take longer than you expect and not obtain the expected price.
• Lack of protection and regulation. As we said before, a large part of consumers think that crypto assets are protected in the same way as other banking financial products or services, however, this is not the case and that is why many countries are developing new regulations to regulate investments in crypto-assets and avoid fraud and scams. As we will see in the next section, regulation is being developed at a European level and in Spain, several measures have been taken by the Bank of Spain and the National Securities Market Commission.
• Existence of security problems. Some cryptocurrency exchange platforms and electronic wallets have been victims of cyberattacks that have caused their clients to lose their assets, the service to be suspended or the private keys with which they access the clients to be lost. For example, the DeFi (decentralised finance) platform PolyNetwork was hacked in August 2021 worth 600,000 euros since a vulnerability in the wallet encryption algorithm was exploited.
• Complex products. Some of the products offered in the crypto-asset market are especially complicated and can lead to increased losses. This means that investment in crypto assets is not suitable for certain consumers who do not have the necessary information or knowledge.
• Fraud. In the world of crypto assets, there is also fraud because there are fake assets used to steal money from consumers through certain techniques such as phishing (a method to cheat and get passwords and secret numbers). In addition, the European authorities warn consumers that there is no procedure to claim since they are not covered by the rules applied in the European Union for financial services.

What measures are being taken in Spain to avoid risks?

While waiting for regulations to be drawn up at a European level that regulates crypto assets, the Bank of Spain and the National Securities Market Commission have issued a circular that regulates the requirements of advertising campaigns for investment in crypto assets. In addition, the Bank of Spain has created a registry in which all those companies that offer specific services related to crypto-assets in Spain must be registered, such as the exchange of cryptocurrencies for currencies in legal tender and digital wallets. These companies must also apply measures to prevent money laundering and the financing of terrorism. However, the measures taken by these two entities are insufficient because they do not cover all the risks that consumers run when investing in crypto assets.

At the European level, the proposal for a regulation of the European Parliament and the Council about the crypto markets, by which the directive known as MICA is modified, is the first proposal for the regulation of crypto actives in the European Union and its objective is the harmonisation regulations in all the countries that belong to the Union.

Users can also take measures to protect themselves, such as getting information from prestigious professionals who know the crypto market and consulting with tax consultants to determine the tax implications of an investment in crypto actives in Spain and what taxes must be paid, how and when.