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Bitcoin's risks explained as UK watchdog bans misleading ad

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Advert for Bitcoin on a bus in the capital's West End during the third lockdown of the Coronavirus pandemic, on 3rd March 2021, in London, United Kingdom. The cryptocurrency hit a new record high of $42,000 late last week, only to plunge by more than 20% over the weekend. Now at around $34,500, bitcoin has still rocketed since October, when it cost $11,000. (photo by Barry Lewis/In Pictures via Getty Images)
An ad campaign in London has been banned for misleading the public about bitcoin. Photo: Barry Lewis/In Pictures via Getty Images

A UK ad campaign by crypto platform Luno, appearing around the London underground and on buses, encouraging the public to buy bitcoin was banned by the Advertising Standards Authority (ASA) on Wednesday.

The ad read: "If you’re seeing bitcoin on the underground" or "on a bus" then "it’s time to buy”. The regulator said the ad was irresponsible and misleading.

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown, explained that the ASA upheld a complaint against Luno "for failing to illustrate the risks of investing in bitcoin on its posters." 

The complaint said Luno "took advantage of consumers’ lack of experience, implying that investing in it was straightforward" when in reality, cryptocurrencies are very complex, she added.

But there is no denying that cryptos, bitcoin being the most popular one and largest by market cap, is in the news everyday. Bitcoin (BTC-USD) has recently proved to be highly volatile amid regulatory scrutiny, environmental concerns and a crackdown from China, but the fact that it crossed $63,000 (£44,527.77) earlier this year and made some very rich means people are wanting to get a piece of the action.

Read more: Bitcoin breaks above $40,000 as market rallies

There may be some for whom bitcoin, and even ethereum (ETH-USD), may be too pricey, but they may still be looking to get into newer cryptos that have a lot of hype around them, such as dogecoin (DOGE-USD), supported by Tesla (TSLA) chief Elon Musk.

So what do investors need to know before diving into the world of crypto? Most crucially, understanding that they are risky.

Streeter told Yahoo Finance UK a big problem with crypto assets is that their value is driven by speculation that in the future they will have a role in the financial system, but this means it's "pretty impossible" to make a call on their current price.

"There are unknown risks within the market because this is a relatively new phenomenon," she added.

"On top of being extremely volatile, most cryptocurrencies are unregulated, which not only adds another layer of uncertainty but also means that investors have little or no protection against fraud," she said.

Watch: What are the risks of investing in cryptocurrency?

In her opinion, bitcoin is not suitable for retail investors, who should instead put their money into "assets they really understand" and funds that offer them more diversification and are regulated.

Jason Cozens, founder and CEO of gold-based payments fintech Glint, also said that "the extreme volatility of cryptos suggest that they are not the solution for everyone". 

Speaking to Yahoo Finance UK, he said that "the factors that have driven investors towards cryptos are the same ones that are attracting consumers to other alternative currencies including gold – a desire for more control over how they spend and save their money, rapidly rising inflation, historically low interest rates, record borrowing and the continuation of quantitative easing."

Two important points potential investors should watch for is regulation, and how financial institutions are dealing with crypto.

According to to Cozens, one of the reasons cryptos are risky is that they could be forced out of mainstream use through increased regulation such as other countries like South Korea joining China in banning crypto.

The UK's Financial Conduct Authority (FCA) recently said that due to the complexities and volatility of these products, the sale of regulated products such as any derivatives are banned to retail consumers. 

The ASA has said that some platforms, such as cryptocurrency exchanges, are outside of the FCA’s remit, and such cryptocurrencies and assets are not financial products "even if they are presented as such."

Meanwhile, financial institutions such as HSBC (HSBA.L) and NatWest (NWG.L) are preventing clients from investing in companies with exposure to cryptos, or even banning corporate clients who accept these currencies as payment.

Read more: How bad is bitcoin for the environment?

The fact that Tesla did a U-turn on its decision to accept bitcoin as a form of payment, impacting the crypto's price, goes a long way to show how volatile the market is.

"Define your risk, understand what you are investing in and do not invest in an asset simply because it is going up," is the advice from brokerage company eToro.

“As with all investment instruments, it's important to do your research... look beyond headline numbers, understand what you are investing in, and do not invest more than you can afford to lose," a spokesperson told Yahoo Finance UK.

Investors must also consider if the environmental impact of mining cryptos is acceptable to them, or if they would like to wait and see if the industry's attempts to decrease its carbon footprint is met with success.

Bitcoin is recovering from the weekend's sell-off, crossing $40,000, but it's still far from its all-time high of more $63,000. By Sunday afternoon, the global crypto market had lost 9% over the last 24-hours, according to data provider CoinMarket.