Cryptocurrencies are one of the most divisive instruments in financial markets. Glance through the comments section of any crypto article in the Financial Times to get a feel for how deep the chasm of opinion is, from those who believe they represent the foundations of the next version of the internet to those who think they are outright ponzi schemes.
The difference seems to be between those who think of crypto as a form of money and those who view it as technology. As Azeem Azhar pointed out on his latest Exponential View podcast, money crypto is what dominates the headlines - it’s all about asset price movements and volatility.
But as we’ve repeatedly said, such as in Bearbull's comment on Why bitcoin can't be a currency in February last year, crypto faces big barriers when viewed in currency terms. Bitcoin and other cryptos have proved extremely volatile, making them a lousy unit of account, and slow processing times lead to transactional problems. And that’s before you hit the regulatory hurdles, an example being China banning crypto transactions last year.
However, it's the technology side of crypto that’s really interesting, as James Norrington, associate editor at IC, has pointed out ('Crypto: too big to ignore but not too big to fail', IC,17 Deceember 2021). Some of the brightest young developers are flocking to crypto to see what they can build. It seems a key innovation that this technology can deliver is the ability to build a software system that can be trusted without trusting any of the participants within it.
Of course, it takes time for these platforms to be mature enough to be useful. Azhar points to the Helium Blockchain as an example of the kind of thing that could be built in tech crypto land that wasn’t possible before. This is a crypto-based low-power network for 'internet of things' (IOT) devices – things such as GPS packages and sensor modules in farms and fields. Normally it would be really expensive to build a global data network, but Helium uses a blockchain mechanism to incentivise individual wifi hotspots to connect to the helium network and provide service to these IOT devices.
It seems likely that most of the current crypto offerings will collapse. There is a lot of hype in this field, partly owing to where we are in the cycle, so only allocate what you can afford to lose to crypto. Crypto-tracking website Coinopsy says that over 60 per cent of initial coin offerings (ICOs) are “dead coins” before their first birthday. The sector is also rife with scams and fraudulent ICOs.
According to data firm Chainalysis’ latest crypto crime report, scammers stole a whopping $14bn (£10.32bn) in cryptocurrency last year, with crypto-related crime rising 80 per cent on 2020.
It’s important to remember that crypto marketing is not regulated, so you will not get your money back if things go wrong. However, crypto firms have to register with the Financial Conduct Authority (FCA) for the purposes of preventing money laundering. If you want to buy crypto, check the FCA register to see if the company through which you intend to buy it is listed.
According to The Sunday Times, the FCA lists 63 firms as being permitted to offer crypto. Of these, 33 serve private investors, with Coinbase, Binance and Gemini all popular exchanges in the UK. Just a handful of companies that give access to crypto – eToro, Revolut, Moneybrain and Archax – are covered by the Financial Ombudsman Service (FOS), which can investigate complaints, as well as the Financial Services Compensation Scheme (FSCS), which can cover up to £85,000 of your money held by a firm, should it go bust. Importantly, the protection only covers cash held in accounts – not crypto assets.