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Investing in cryptocurrency: the most common misconceptions and mistakes
Bitcoin has hit an all-time high, but some investors don't know what they're getting into when putting their money into cryptocurrency
Around one in eight UK adults are invested in cryptocurrency, according to a new survey by the Financial Conduct Authority (FCA).
These figures come as the most well-known crypto asset, Bitcoin, reached a price of more than $100,000 for the first time last week following the election of Donald Trump as US president.
The FCA's new research has highlighted the common misconceptions about investing in cryptocurrency that could result in financial losses.
Read on to find out where some investors are going wrong, and for advice on how to make the right decisions with your money.
Please note: the content contained in this article is for information purposes only and does not constitute financial or investment advice.
Investing in cryptocurrency is not regulated
Cryptocurrency is largely unregulated in the UK, but many investors aren't aware of this.
The FCA's research found that 20% of crypto investors thought they would receive some form of compensation if their holdings lost value, while 33% thought they’d be able to complain to the FCA.
Dan Coatsworth, investment analyst at AJ Bell said: ‘Crypto assets are extremely volatile and the regulator has dragged its feet with creating a proper framework for the asset class. To date, the FCA only regulates crypto around anti-money laundering and marketing which means there is no proper safety net if things go wrong.
‘We could now be at a turning point, as the government has indicated it will publish a proper regulatory framework next year.’
A quarter of people not currently invested in cryptocurrency said they would be more likely to invest if it was regulated. The FCA is therefore also taking into account whether regulation would be read as endorsement and encourage more investment where it’s not appropriate.
- Find out more: are your investments protected?
You have to pay tax on crypto gains
Many crypto investors don’t know they may need to pay tax on their investments.
Elsa Littlewood, tax partner at BDO said: ‘There is a lot of confusion around when and how tax is applied to cryptocurrency. For example, not everyone will know that tax may be due when they exchange one cryptocurrency for another or pay for a product or service using cryptocurrency. However, the tax authority doesn’t see ignorance of the law as an excuse.’
58% of crypto asset owners weren’t aware that when they bought goods and services using crypto they might be liable to pay tax. And 50% didn’t know they might be liable to pay tax when they exchange crypto into a currency such as pounds or dollars.
If you make a profit of more than £3,000 on a crypto investment, you’ll be liable to pay capital gains tax (CGT) at a rate of 18% for basic-rate taxpayers or 24% for higher-rate taxpayers. This will be owed when a ‘disposal’ is triggered, meaning you sell crypto for cash or exchange it for something.
Unlike other types of investment such as stocks and shares or funds, you can’t hold crypto in a stocks and shares Isa.
- Find out more: the best stocks and shares Isas
Don't borrow to buy crypto
Most people (72%) use their disposable cash and income to buy crypto, with some (26%) also using long-term savings. But there has been an alarming trend towards people using credit cards or loans to purchase crypto, up from 6% in 2022 to 14% in 2024.
It’s never a good idea to go into debt to purchase an investment and, in fact, you should clear any outstanding high-interest debts before you start investing. This is because the debt will most likely grow at a higher rate than the investment, leaving you worse off than if you’d paid off the debt instead.
You should also build an emergency savings fund to cover any unexpected expenses before you get started with any investment. This should be three to six months’ living expenses.
If you've invested your emergency savings, you might have to sell your investments at a time when they’re performing poorly, meaning you'd end up losing money.
- Find out more: are you ready to invest?
Do your own research before investing
Cryptocurrency investors don’t tend to take professional advice or guidance before making the decision to invest. People investing in crypto most commonly got their information from online forums (38%), friends and family (36%), and social media (28%).
Worryingly, one in 10 crypto asset users said they didn’t do any research at all before investing, and four in 10 didn’t believe they had a good understanding of how the underlying technology works. Crypto is a high-risk investment, and should only be bought if you really understand how it works and what can affect the price.
With any investment there’s a risk that you’ll lose everything you put in, but with crypto this risk is much more pronounced.
Other types of investment are tied to something tangible – for example a company’s performance or the supply of a commodity – but the price of crypto is only affected by how investors feel about it. This means the price is very volatile compared to other types of investment.
- Find out more: investment funds explained
