Frequently hailed as “the next big thing” in the world of investment, cryptocurrencies are virtual currencies which are also dominionless. Rather than being controlled and regulated by a national bank, in the same way as most standard (fiat) currencies are, cryptocurrencies are self-regulating through algorithms and are not affiliated with a particular company.

To invest in cryptocurrencies, buyers need to obtain currency through a third party and also have access to a cryptocurrency wallet: software where the currency can be “stored”.

Although there are a significant number of people who have bought into one of the various cryptocurrencies out there, it’s important to realise that in certain important respects, cryptocurrency isn’t like more traditional investment choices. Here we highlight some of the key differences between cryptocurrencies and other available investments.

Cryptocurrency is unregulated

Cryptocurrency is self-regulating, moderated through algorithms. Because it’s not under the jurisdiction of any government, it’s not subject to the regulatory frameworks which govern other investments.

For example, the conduct of financial institutions is governed by the FSA; investing in property is regulated through laws relating to property ownership. These regulatory and legislative requirements provide a degree of security for investors, including clear paths of accountability and responsibility. In the event that a cryptocurrency investment goes wrong for any reason, you may find that you have limited legal recourse.

Cryptocurrency is entirely online

Most other investments involve some sort of tangible asset: investing in property means you obtain a building; company shares are investments which involve a real-life company; even investing on the stock market involves calculated risk relating to real companies or goods.

Cryptocurrency is entirely virtual. You will have nothing to show for your investment, except possibly a profit when it’s time to sell. This isn’t necessarily a bad thing, but it does mean that investing in a currency such as Bitcoin, Ethereum, Litecoin or Ripple is significantly different to other investments.

Cryptocurrency is a new investment opportunity

There’s never been anything quite like cryptocurrency before, so it’s quite an unknown quantity in terms of its appeal as a long-term investment. Although some people have reported making a profit when they’ve sold their cryptocurrency, it’s unclear at this stage whether profit is going to be sustained in the longer term.

Other investments tend to have historical records available. Any investor can check how property prices or share prices have fluctuated over time. Although previous performance cannot be taken to indicate future success, the vast majority of wise investors do, at least, take historical records into consideration. Cryptocurrency investment is therefore very much a step into the unknown.

Cryptocurrency has limited use as a currency

Virtually every other investment option involves either goods or services – something which has a use. Property, companies or other assets all have some function.

Cryptocurrency is rarely used as a currency and is almost entirely traded by investors. There are very few things that can be bought with cryptocurrency, so it’s not as if it can be used in the same way as dollars or GBP. It’s possible that some cryptocurrencies might become widely used in the future but it is difficult to know which cryptocurrencies will prove useful and which ones will be forgotten.

Cryptocurrencies are a new investment opportunity which has attracted considerable interest over the past few years.

Given the several significant differences between it and other, more traditional forms of investment, we suggest that significant research is needed before deciding to invest in a cryptocurrency. While it may appear attractive in the short-term, it’s unclear at this stage whether cryptocurrency buyers stand a reasonable chance of realising a return on their investment.

To find out more about the legal situation as it applies to cryptocurrency as an investment, request your free, no-obligation consultation from Integra Solicitors on (0161) 870 6629.