Nothing screams “steer clear” quite like a big name with a tax fraud record getting involved in a financial market likened to the Wild West.
But when that name is Lionel Messi and the market is cryptoassets, all bets – and I use that word deliberately – are off.
When news that Messi’s welcome package on joining PSG from Barcelona included the club’s cryptocurrency fan tokens, demand sent the price of the tokens through the roof.
This is how it is with crypto.
It’s like that debate the other year about a seemingly ordinary dress that half the world thought was blue and black and the other half insisted was white and gold.
Similarly, cryptocurrencies tend to be positioned either as the key to the future or a disaster waiting to happen. It depends on your view – and you won’t find many people sitting on the fence on this one.
What is crypto?
Cryptocurrencies are virtual currencies that exist on encrypted decentralised networks known as distributed ledgers. The best known cryptocurrency, Bitcoin, is built on a ledger known as a blockchain.
The price of Bitcoin, launched in 2009, recently returned to near record highs, the latest stage in a rollercoaster ride that has prompted renewed concerns of it being a ‘bubble’ primed to burst.
The highs and lows are part of the appeal of crypto assets such as Bitcoin, attracting
speculative investors seeking big profits.
The outsider status of cryptocurrencies adds to their lustre. It’s often perceived as subversive and outside the mainstream, a disruptor that takes control of the system away from the banks.
Awareness and ownership of crypto assets is growing, says the Financial Conduct Authority (FCA). But research by the City watchdog – which requires crypto exchanges to register with it but doesn’t regulate cryptocurrencies – also found that overall investor understanding of cryptocurrencies, which was already low, is falling.
And this is the concern. Because for all its outsider appeal and the potential for big gains, cryptocurrencies are incredibly volatile as an investment.
Beware the danger, scams and fraud
Among those urging caution are Andrew Bailey, governor of the Bank of England, who recently described cryptocurrencies as “dangerous” and warned that investors “should be prepared to lose all their money”.
Gary Gensler, chair of the US Securities and Exchange Commission, recently likened
cryptocurrencies to the wild west, adding that it was “rife with fraud, scams and abuse”.
But cryptocurrencies aren’t going away. On the contrary, they have an important and potentially game-changing role to play in the future of finance, particularly if the main Central Banks develop their own digital currencies (as seems increasingly likely, to the alarm of traditional banks and payment providers).
Some national central banks are already testing digital currencies, including China, France, Sweden, Japan and Switzerland, while a growing number of firms – including Microsoft, Starbucks, PayPal, Visa and Apple – are accepting or piloting payments in cryptocurrencies.
Cryptocurrencies and the digital technologies that enable them have the potential to transform finance.
Can you afford to lose it?
That doesn’t make individual cryptocurrencies a good investment now, however.
As cryptocurrencies mature it will become easier to invest in them indirectly, such as through investments in the companies driving the market.
In the meantime, the likes of Bitcoin will remain highly volatile. Any asset that regulators and governments are worried about is vulnerable to legislation that aims to rein it in.
The message for savers or investors is to either steer clear of bitcoin and any other crypto asset, or only invest a small amount that they can afford to lose.
Anything that promises high returns involves taking high risks too, and the usual warning applies: if it sounds too good to be true, it probably is.