It’s probably happened to you by now. A friend or family member with no previous interest
in the markets has asked for your opinion on buying crypto.
Definitely, I get a lot of people asking me, ‘Finn, what should I buy?'
'What’s the next thing that’s going to go up?’
It’s not just you. A survey of 1,000 adults in the United Kingdom revealed that nearly half
of people aged between 18 and 29 made their first ever investment in cryptocurrencies.
The risk is a lot of people making their first investment and then getting burnt.
Now even the International Monetary Fund is sounding the alarm, saying the crypto
boom could threaten financial stability.
The cryptocurrency market is worth trillions. In November 2021, its total market cap reached
$3 trillion for the first time. It’s no wonder it’s capturing so many people’s attention.
So, what should you know before you get involved? And why is the IMF so worried?
My name is Finn Juddell. I am 22 years old. I actually work as an investment banker and
lead the crypto division at a small, little boutique investment bank. I also manage a small
funds management business called FJ Syndicates.
I have a funny story for you actually – I got into Bitcoin, that was all fun, I had a bit in my wallet.
It went up in value. I was like, 'This is pretty cool.'
My first stint into doing research and finding crypto was actually a scam, so I learned
the hard way pretty quickly of what to look for and what not to look for in a crypto project.
Finn’s experience is a common one. While more
than 16,000 tokens have been listed on various exchanges, only around 9,000 remain today.
What happened to the other 7,000 or so? Well, some developers have walked away.
Some tokens just aren’t getting traded. And, the IMF says, some were set up
purely for speculative purposes – or like Finn encountered – were just an outright scam.
Not a lot of young people, I believe, understand the risk of cryptocurrency investments.
It is simply too volatile for many people.
Myron Jobson was a part of the team at investment platform Interactive Investor
that published the survey we mentioned at the beginning of this video:
the one about 45% of young people making their first investment in cryptocurrencies.
They also found that a number of
these transactions were made using credit cards, student loans and other means of borrowing.
For example, 56% of respondents who
invested in either bitcoin or dogecoin turned to debt to fund their investments.
You can’t get away from cryptocurrency, you really can’t. You can go on the
London underground and see adverts about cryptocurrency — missed out on Bitcoin,
well, invest in this space of cryptocurrency — which I think is wholly irresponsible.
And also on social media there is an association with the high life, living the grand lifestyle
that a lot of influencers put out there because cryptocurrencies are often advertised next to
these posts exploring this glamourous lifestyle. I think that association is very dangerous.
This is a concern shared by the U.K.’s financial watchdog, the Financial Conduct Authority or FCA.
Its survey of 1,000 young investors in high-risk products (aged between 18 and 40) found that they
are driven by competition and influenced by hype.
In fact, 58% of respondents said that constantly hearing about a certain investment on the news,
on social media and from other people encouraged them to purchase specific investments.
I don’t think it is right to say that people can make money or if you missed out on bitcoin,
this is the next big thing, I don’t think that’s responsible advertising.
So I think policy makers should definitely have looked at that.
Yes, you could make money from investing
in cryptocurrencies, but the volatility of cryptocurrency
it just doesn’t work for many everyday investors and that needs to be made clearer.
The IMF is calling for tougher regulations as well. In a recent paper, its authors touted
the “new world of opportunities” a flourishing crypto ecosystem opens up.
But it's the fact that crypto assets are becoming so mainstream
that could put the financial stability at risk.
The crypto ecosystem has grown significantly, it keeps growing very quickly in the last few years.
The process shows remarkable resilience but there have also been some interesting
stress tests.
Evan Papageorgiou, one of the paper’s authors, walked me through some of them.
First, there’s the rollercoaster ride
these assets have been on. Sure, you could make a lot of money, but you can also lose it all.
There are the customers who had their funds stolen by hackers. The lack of oversight also creates data
gaps, which can open doors for tax evasion, money laundering and even terrorist financing.
There has to be a trade off with the innovation associated with crypto
and potential risks. It is not just young people, there's a
broader segment of the population that is involved more and more, with different motivations
As more people begin to use crypto assets instead of their local currency
– a process the IMF described as cryptoization – this can undermine
the effectiveness of central bank policies.
This is especially true in emerging and developing economies,
the same countries the IMF says are leading the way in cryptocurrency adoption.
Digital currencies appear to be here to stay – so if you do want to get involved,
what do you need to know before you part with your money?
It is really important to look for strong development communities in a crypto project,
because that really is where the heart of it lies. So really looking into fundamentals of what are
they building, where is the value they are adding to the world and where is the market for that.
So you are suggesting that people should do some research
before putting their money into cryptocurrencies?
Definitely. Before you make any financial decisions,
make sure you understand what you are investing in – that’s definitely the number one rule.
Finn recommends asking yourself three questions:
Does the founding team hold a large proportion of the tokens,
and are they barred from selling them all at once?
Is the project trying to raise too much money by overestimating the value of its tokens?
What does the project do? Does it add any real-world value?
Don’t invest it all on cryptocurrency. Yes it’s okay to dabble. If you want to do it,
make sure it is a very, very tiny fraction of your overall
portfolio, your investment portfolio should be diverse.
Like many young people that want to get on the housing ladder,
you have to consider how your investments could help you get on the property ladder.
Cryptocurrency investments is simply too volatile.