Cryptocurrencies and especially bitcoin are becoming an increasingly popular asset for investors to add to their portfolios, and more are doing so at a rapid pace.
Yet many investors still don’t fully understand the asset class, and this could expose them to significant losses.
Figures from last year show that some 12 per cent of investors have crypto in their portfolios, but this figure is likely now higher.
Despite this, as many as 72 per cent of investors said they aren’t knowledgeable about cryptocurrencies, according to data from the crypto investment company Wisdomtree.
A third, some 31 per cent, said they wouldn’t know what action to take in the event of a sharp price fall, WisdomTree’s data shows.
With the Financial Conduct Authority now regulating crypto platforms and set to lift its ban on crypto exchange-traded products from 8 October, even more investors could decide to commit their money to these assets.
Of those investors who hold crypto, a quarter said they are using it as part of their retirement strategy, while a fifth said they had invested to help them towards a home purchase
A fifth said they would be more likely to invest if there was a change in local market rules, according to figures from WisdomTree.
Two fifths of investors said they would be more likely to make cryptocurrency investments if their investment platform or adviser offered access.
Under current rules, crypto investors need to use crypto-specific platforms to access digital assets, instead of having the option of crypto products traded on stock exchanges.
Adria Beso, head of European distribution at WisdomTree, said: ‘Now that the FCA has permitted retail access to UK-listed crypto ETPs, we expect this to become the preferred vehicle for investors.
‘Institutions will play a crucial role in guiding adoption, whether through advisers, platforms, or direct allocations.’
The tokens have boomed over the past year, largely on the back of Trump’s presidency, though this has also been followed by a swathe of financial institutions investing in crypto assets and a number of crypto holding firms springing up over recent months.
Because of this, more investors are viewing crypto as something that can contribute to their long-term saving and investing, rather than for speculation.
Of those investors who hold crypto, a quarter said they are using it as part of their retirement strategy, while a fifth said they had invested to help them towards a home purchase.
Yet despite their impressive performance and rising popularity among investors, these assets remain incredibly high risk and should only form a small part of most investment portfolios.
Dovile Silenskyte, director of digital assets research at WisdomTree, said: ‘Bitcoin is a very volatile asset. Over the past 11 years, it was the best performing asset during eight of those years, and the worst-performing asset during three of those years. And it hasn’t found itself anywhere in the middle.’
Based on WisdomTree’s research, one in four investors say they would allocate more than 10 per cent of their portfolio to crypto.
This is well above what most experts recommend for crypto allocation.
WisdomTree said that crypto exposure of just one per cent in a diversified portfolio would help to improve returns without having much impact on overall risk.
Silenskyte said: ‘I think this is quite important to recognize that people may be lacking understanding for how much crypto is appropriate within their portfolios.
‘Education is essential to helping investors use crypto sensibly and manage the ups and downs. By understanding how crypto works in a portfolio and how to react when prices fall, people can avoid taking on too much risk and make decisions that support their long-term goals.
She added: ‘Simple approaches like investing regularly and building balanced portfolios can make a real difference over time.’
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