Recently, the Bank of England made a statement about the risk of cryptocurrency that may have taken some by surprise. Traditional financial institutions generally give cryptocurrency a wide berth, so any comments they make often have a big impact.
Here’s exactly what the BoE said about the risk of cryptocurrency and some tips for budding investors.
What was in the BoE statement about cryptocurrency?
On 8 October, the UK’s central bank released a riveting read entitled Financial stability in focus: the corporate sector and UK financial stability. The bulk of the document relates to:
- Resilience of banks
- Risk-taking in financial markets
- UK businesses taking on more debt due to the coronavirus pandemic
They’re all very exciting (*yawn*) and unsurprising topics for a central bank to discuss. However, eagle-eyed readers spotted a sentence in the document that reads: “Cryptoasset markets continue to grow rapidly, but currently pose limited risk to UK financial stability.”
Does this mean cryptocurrency is safe?
This is an interesting comment from the BoE, but don’t take it as a green light for digital assets like Bitcoin.
What they’re saying is that although crypto markets are booming, the current size of the space means it does not pose a threat to financial stability in the UK.
The context here is important. They are talking about the risk of derailing the whole economy. The Bank of England is not saying it’s impossible for crypto to wreck your personal finances.
What would be the scale of a crypto wipeout?
The current market cap of the entire cryptocurrency space is around $2 trillion (£1.47 trillion). This may sound like a lot, but that estimate puts its somewhere between Amazon (AMZN) and Apple (AAPL).
So if the whole digital token market exploded and went to zero, it would be the financial equivalent of losing a big tech company. Not ideal, but the world previously survived without companies like these, and I’m sure it will keep on turning if one was to disappear!
If £1.7 trillion of digital tokens were to be wiped from the face of the Earth, it could have a significant impact on a lot of people. But it wouldn’t destroy economies…for the moment.
What does the future hold for crypto?
The BoE document goes on to say: “Regulation needs to develop quickly enough, both domestically and at a global level, to address the risks [cryptocurrencies] could pose in the future.”
So the bank acknowledges that this area is growing rapidly and, as a result, could pose a threat to economies in the future.
The bank is calling for wider domestic and global regulation in order to keep a lid on things. Cryptocurrency works on a global level, so UK rules would not be enough to control it. Without international cooperation, users would just move their assets elsewhere.
If there’s one thing the Pandora Papers taught us, it’s that people with money have no problem shifting assets to other countries to avoid taxes and regulations.
What other investment opportunities are there?
The fact that there’s even a discussion around ways digital assets could derail the UK economy will probably be enough to make you question whether that’s where you should put your money.
Luckily, there are plenty of safer ways you can invest. For example, using one of our top-rated share dealing accounts, you can put money into some of the best companies in the UK and abroad that have a proven track record of strong performance.
You can also use a stocks and shares ISA for your investments, which is something you can’t do with cryptocurrencies. People often forget the complex and expensive tax arrangements associated with crypto gains. An S&S ISA means you can avoid this potential burden with your investments!
The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of investment advice. Bitcoin and other cryptocurrencies are highly speculative and volatile assets. They carry several risks, including the total loss of any monies invested. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
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About the author
George is a writer and qualified financial adviser focused on educating others in personal finance & investing.
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