Why cryptocurrencies call for caution

Cryptocurrencies have attracted high levels of investment recently. The prospect of substantial returns has brought in many new investors, drawn by a massive rise in the price of assets such as bitcoin, which tripled in value in the three months from October 2020.

That has not been a straight-line increase though, and there are concerns that some individuals are being lured into viewing this type of investment as similar to cash. These have prompted the Financial Conduct Authority, the regulator that oversees the activities of companies such as fund managers and advisors, to urge caution.

The high levels of risk inherent in bitcoin mean that it is suitable only for adventurous investors, and it should be used to diversify a portfolio that spans various areas including bank deposits, equities, bonds and other assets.

The sharp fluctuations in value mean that it is possible to make substantial profits by correctly timing purchase and sales. That, however, is a risky business. Indeed, there are suggestions that bigger players such as companies are moving into this market – a sure sign that a degree of expertise or good luck will be needed in order to invest successfully.

As with all forms of investment, the old adage of not having all your eggs in one basket is particularly relevant. That’s why achieving a spread of risk and weighing that up against potential return is an essential part of our financial planning advice service here in Chester and the surrounding area.

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