Cryptocurrency  

Risks and rewards of cryptocurrency

This article is part of
Guide to bitcoin and blockchain

Add to this latency and volatility the recent moves by banks to block cryptocurrency gains from being consolidated into sterling and used as a deposit towards a mortgage - as reported by sister title the Financial Times - and the transactional utility of cryptocurrency becomes less of a positive argument in favour of it. 

Regulation

When China starts cracking down on cryptocurrency because it cannot control it, then the rest of the world should sit up and take notice, especially so since, as at December 2017, data from Cambridge University's Judge Business School revealed China mined 58 per cent of bitcoin, compared with 16 per cent in the US and 26 per cent in the rest of the world.

The UK, France, Germany, US, South Korea and China have all in recent weeks announced measures to rein in the excesses of cryptocurrency trading. The Financial Conduct Authority in the UK has issued a public warning about initial coin offerings (ICOs) (see info box).

Banks such as Lloyds in the UK have banned people from using credit cards to buy bitcoin (aka, 'getting into debt' to buy Bitcoin and its crypto peers). 

Miles Eakers, chief market analyst at Centtrip, states: "Governments across the globe continue to clamp down on retail investors speculating on cryptocurrencies, with the People’s Bank of China stating it would step up measures to remove any onshore or offshore platforms related to virtual currency trading or ICOs, ‘to prevent financial risks’."

The announcement pushed the price of Bitcoin down, and Mr Eakers believes the next technical level will drop to $5,000 a coin (£3,571). 

With each regulatory announcement, the price of cryptocurrencies, led by their standard-bearer, Bitcoin, drops further.

Ms Chovin explains why: "As cryptocurrencies are seen by many as a way to evade taxes and fund fraudulent or criminal activity, the principal threat we see to their widespread adoption is government intervention."

She points out the effect of the measures announced by the South Korean government at the end of December to curb abuses of digital currencies.

This was a significant step by the country, as South Korea is one of the world's biggest users of Bitcoin. Following the announcement, the value of the digital currency fell approximately 11 per cent.

Protections

The very freedoms which, as Mr Futter points out, make for an attractive proposition for some, can prove to be a risk for others. "The crypto market operates in a developing regulatory market. As a result, investors cannot expect the same types of investor protections they typically receive when transacting with banks and securities exchanges.

"The decentralised nature of blockchain also means that, in most instances, there is no central address to go to if problems emerge, and due to the anonymity of much blockchain activity, often limited ability to identify and act against 'bad actors'.