CRYPTOCURRENCIES such as Bitcoin, Dogecoin and Ethereum have had a bumper couple of months, regularly reaching record new prices.
But what is causing these price spikes and should investors be thinking about entering these extremely volatile markets?
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On April 14, Bitcoin reached its highest price for the second day running, surpassing $64,000 for the first time since the currency was invented.
Meanwhile, the price of Dogecoin hit a fresh all-time high on May 5 as interest in the "joke" cryptocurrency grew stronger.
And Ethereum’s cryptocurrency, ether, surged past $3,000 for the first time in May too, marking a 325% rise since the beginning of this year.
Below we explain why cryptocurrencies are going up in value, although all three have fallen slightly in the past few months.
Investors should be aware that cryptocurrencies can be extremely risky, and you should never put in more cash than you can afford to lose.
Why are cryptocurrencies rising?
The first thing to know is that cryptocurrencies are extremely volatile, which means their prices can rise and fall in the blink of an eye.
You should only invest if you can afford to lose the money.
These types of investments are VERY complex and open to scams. Don't part with any cash unless you are happy to risk that you may not get it back.
While lots of these virtual currencies are currently seeing massive price spikes, several experts are predicting a bubble which means prices could come crashing down at any minute.
Price rises across the cryptocurrency world are being driven by several key factors.
One major contributor was the direct listing of cryptocurrency exchange site Coinbase on the Nasdaq stock exchange in April.
This historic float meant that people were talking about cryptocurrencies bringing lots of attention to the sector, and was linked to record-breaking Bitcoin prices.
Another significant factor is that some mainstream businesses have said that they intend to start letting customers pay in some of the more well known virtual currencies.
How to spot crypto scams
CRYPTO scams are popping up all over the internet. We explain how to spot them.
- Promises of a high or guaranteed return – Does the offer look realistic? Scammers often attract money by making fake promises.
- Heavy marketing and promotional offers – If they are using marketing tricks to con customers you should beware.
- Unamed or non-existent team members – Just like any business you should be easily able to find out who is running it.
- Check the whitepaper – Every crypto firm should have a white paper. This should explain how it plans to grow and make money. If this doesn't make sense, then it could be because the founders are trying to confuse you.
- Do your research – Check reviews online and Reddit threads to see what other people think.
For instance, Paypal recently announced that its users will be able to buy and sell Bitcoin – and even make purchases.
Both Mastercard and BNY Mellon have also revealed plans to incorporate Bitcoin into their businesses.
There's also speculation today that Amazon could soon accept the cryptocurrency as a payment method.
Another core driver of virtual currency prices is well-known celebrities getting in on the act and promoting their favourite ones.
For instance, Tesla CEO Elon Musk and rapper Snoop Dogg are both famously fans of Dogecoin, a cryptocurrency that started as a parody.
A final factor is that prices are being pushed by the investors themselves, hoping to create a market surge and cash in on rising values.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, has previously warned:"Holders of cryptocurrencies are on a wild ride of speculation, prompting fresh concerns that many could end up with their fingers burnt, if the prices suddenly drop.
"Demand in the crypto world is mainly coming from traders trying to ‘game’ the system and others hoping to benefit from future price rises rather than use the coins as a means of exchange.
"Trying to predict predicting the level at which demand subsides and prices begin to fall is highly difficult."
Why is investing in cryptocurrencies so risky?
All investments can go up as well as down, but cryptocurrency is far more volatile than many other asset classes, meaning it is very high risk.
All of the cryptocurrencies are a speculative investment, with limited track records, so it's hard to predict what will happen next.
There are also significant fears that many of these currencies are an investment bubble that could burst, leaving investors with next to nothing when prices drop.
There is no guarantee that you can convert your virtual coins back into cash, as it may depend on the demand and supply in the existing market.
With very few options for "spending" the coins – you could be stuck with assets that are plummeting in value.
5 risks of crypto investments
THE Financial Conduct Authority (FCA) has warned people about the risks of investing in cryptocurrencies.
- Consumer protection: Some investments advertising high returns based on cryptoassets may not be subject to regulation beyond anti-money laundering requirements.
- Price volatility: Significant price volatility in cryptoassets, combined with the inherent difficulties of valuing cryptoassets reliably, places consumers at a high risk of losses.
- Product complexity: The complexity of some products and services relating to cryptoassets can make it hard for consumers to understand the risks. There is no guarantee that cryptoassets can be converted back into cash. Converting a cryptoasset back to cash depends on demand and supply existing in the market.
- Charges and fees: Consumers should consider the impact of fees and charges on their investment which may be more than those for regulated investment products.
- Marketing materials: Firms may overstate the returns of products or understate the risks involved.
Cryptocurrency firms are not regulated in the way that other financial services and investment firms are. This means that you won't have any protection if things go wrong.
You won’t be able to take a complaint to the Financial Ombudsman Service and there aren't any protections if the companies go bust, for example.
UK Crypto businesses must register with the Financial Conduct Authority on the Financial Services Register – but the watchdog doesn't have any powers over how they carry out their business.
In fact, in January, the Financial Conduct Authority warned that Brits risk losing ALL of their money if they invest in cryptocurrencies.
Ms Streeter said: "Investors would be wise to heed the warnings from the Financial Conduct Authority that dabbling in products they don’t fully understand could have a serious impact on their wallet, given that they risk losing all the money they put in.
"Increasing numbers of traders are being persuaded to take the plunge by influencers on social media, and chatter across internet forums.
"FCA research has shown that many people who put money into high risk products appear to be thrill seekers who are investing for a challenge or for competition."
How to make sure you avoid the scams
If you do want to invest in cryptocurrency, you need to make sure you've done your research thoroughly.
You can start by checking this list of businesses not registered with the FCA. If a company is on this list then they may be operating illegally.
The cryptocurrency marketplace is a target for fraud,with more than £2million lost scams – that’s over £10,000 per person – between June and July 2018, according to Action Fraud.
If it sounds too good to be true, it probably is – so avoid anything that promises sky high returns or has heavy marketing offers.
Research thoroughly and make sure you understand how the business works, how it plans to make money and grow and find out about the people who set it up.
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