The Risks of Cryptocurrency Investing

At Folkes Worton, we believe that informed decision-making is at the heart of successful financial planning. Here we explore the key risks associated with cryptocurrency investing and the considerations investors should keep firmly in mind.

Cryptocurrency is a digital form of money that uses blockchain technology to record transactions and ownership. Unlike traditional currencies such as the pound sterling, most cryptocurrencies operate independently of central banks and governments.

Popular cryptocurrencies include:

• Bitcoin (BTC)
• Ethereum (ETH)
• Solana (SOL)
• Ripple (XRP)
• Cardano (ADA)

Whilst these digital assets have become more widely accepted, they remain highly speculative investments.

One of the biggest risks of cryptocurrency investing is price volatility.

Cryptocurrency values can rise or fall dramatically within hours. Unlike traditional investments such as shares, bonds or property, crypto markets often react sharply to:

• Regulatory announcements
• Economic news
• Market sentiment
• Social media activity
• Security concerns

For example, it is not uncommon for major cryptocurrencies to experience daily price swings of 10% or more. Smaller cryptocurrencies can be even more volatile, with some losing significant value in a matter of days.

If you are investing money that you cannot afford to lose or may need access to in the short term, cryptocurrency may not be a suitable investment vehicle.

Traditional financial products in the UK often benefit from regulatory oversight and consumer protections. Cryptocurrency investments generally offer far fewer safeguards.

Whilst some crypto-related businesses are regulated for anti-money laundering purposes, cryptocurrencies themselves are not regulated in the same way as traditional investments.

This means investors may not be protected if:

• A cryptocurrency exchange fails
• Assets are lost or stolen
• Fraudulent schemes collapse
• Market manipulation occurs

Unlike bank deposits, cryptocurrency holdings are typically not covered by the Financial Services Compensation Scheme (FSCS).

Cryptocurrencies are digital assets, making them vulnerable to cyber threats.

Common risks include:

Cybercriminals frequently target cryptocurrency exchanges and digital wallets. Large-scale breaches have led to millions of pounds worth of crypto assets being stolen.

Fraudsters often impersonate exchanges, wallet providers and investment platforms to gain access to investors’ accounts.

If investors lose their wallet credentials or private keys, recovery may be impossible. In many cases, lost cryptocurrencies cannot be retrieved.

For investors managing significant holdings, robust security measures are essential.

The rapid growth of cryptocurrency has unfortunately attracted fraudsters seeking to exploit inexperienced investors.

Common scams include:

• Fake investment schemes
• Ponzi schemes promising guaranteed returns
• Fraudulent Initial Coin Offerings (ICOs)
• Social media impersonation scams
• “Pump and dump” market manipulation schemes

A simple rule of thumb is that any investment promising guaranteed or unusually high returns should be treated with extreme caution.

Many investors mistakenly assume that cryptocurrency gains are tax-free. In reality, HMRC generally treats cryptocurrency as a taxable asset.

Depending on individual circumstances, investors may be liable for:

Tax may arise when:

• Selling cryptocurrency
• Exchanging one cryptocurrency for another
• Using cryptocurrency to purchase goods or services
• Gifting cryptocurrency to another person

Income Tax may apply in certain circumstances, such as:

• Crypto mining
• Staking rewards
• Employment-related crypto payments

Failure to keep accurate transaction records can create significant compliance issues and unexpected tax liabilities.

Because crypto transactions can involve numerous purchases, transfers and exchanges, maintaining comprehensive records is vital for accurate tax reporting.

Governments and regulators across the world continue to develop new cryptocurrency regulations.

Future regulatory developments could impact:

• Market access
• Investor protections
• Tax treatment
• Exchange operations
• Cryptocurrency valuations

A regulatory announcement from a major economy can significantly influence global crypto prices, often within hours.

Not all cryptocurrencies are easy to buy or sell.

Whilst major cryptocurrencies such as Bitcoin and Ethereum generally have active markets, smaller tokens may suffer from limited liquidity.

This can create problems when investors wish to sell, particularly during periods of market stress.

In extreme cases, investors may struggle to find buyers or may be forced to accept significantly reduced prices.

Unlike shares, which represent ownership in a business, or property, which provides a tangible asset, many cryptocurrencies derive their value primarily from investor demand.

This means prices can be heavily influenced by sentiment, speculation and market confidence.

When confidence weakens, values can fall sharply.

Investors should therefore avoid allocating funds to cryptocurrency purely on the basis of hype or fear of missing out (FOMO).

The 24-hour nature of cryptocurrency markets can encourage impulsive decision-making.

Many investors experience:

• Fear of Missing Out (FOMO)
• Panic selling during market declines
• Overconfidence during bull markets
• Excessive risk-taking

Successful investing requires a disciplined approach, regardless of the asset class involved.

A well-diversified portfolio and clearly defined investment objectives remain essential.

Cryptocurrency may have a place within some investors’ portfolios, particularly those with a higher tolerance for risk and a long-term investment horizon.

However, it should rarely form the foundation of a financial strategy.

Before investing, individuals should consider:

• Their overall financial goals
• Existing investment diversification
• Tax implications
• Risk tolerance
• Liquidity requirements

Professional advice can help ensure that investment decisions align with broader financial objectives.

Cryptocurrency investing offers exciting opportunities, but it also carries substantial risks that should not be underestimated. Market volatility, regulatory uncertainty, cybercrime, fraud and complex tax considerations all make cryptocurrency a high-risk investment compared with many traditional asset classes.

For UK investors and business owners, understanding these risks is essential before committing funds. A balanced approach, supported by professional financial and tax advice, can help investors make informed decisions and avoid costly mistakes.

At Folkes Worton, we help individuals and business owners understand the tax implications of investments and ensure their financial affairs remain compliant and efficient. If you would like advice on Capital Gains Tax, investment structuring or broader tax planning, contact our team today.

Our previous ‘Insight’ from December 2025 details how Digital Assets have become ‘Recognised Property’ – CLICK HERE

Folkes Worton LLP Chartered Accountants
Accounting for the Future