Cryptocurrencies are rapidly gaining popularity amongst investors due to being advertised as ‘get rich quick’ investments. They have particularly increased in attractiveness since the pandemic, with many people feeling obliged to take on greater risks to compensate for the economic uncertainty and concerns caused by the rising cost of living. However, cryptocurrencies are extremely speculative, risky and unregulated.
Jonathan Watts-Lay, Director, WEALTH at work, a leading financial wellbeing and retirement specialist, explains cryptocurrencies and highlights the main risks for employees to be aware of:
What are cryptocurrencies?
A cryptocurrency is a digital or virtual currency that is secured by cryptography (encrypted data). Cryptocurrency does not exist in physical form (like paper money) and is typically not issued by a central authority, rendering them supposedly immune to government interference or manipulation.
Why are they attractive to consumers?
There are some factors that make cryptocurrencies attractive to consumers such as cheaper and faster money transfers and the fact that they enable secure online payments without the use of third-party intermediaries. They are also decentralised so they cannot be influenced by governmental/economical events that currencies issued by a central authority would be impacted by.
What are the risks?
The high price volatility of cryptocurrencies is the major risk. It makes them poorly suited to the three traditional uses of a currency: as a store of value, as a unit of account and as a medium of exchange. In fact, apart from occasional publicity stunts, it is hard to see why any normal business would be willing to be paid in a cryptocurrency.