Cryptoassets vary in their characteristics and risks. Before buying, ensure you understand the specific risks. Do not invest unless you are prepared to lose all the money you invest. This is a high-risk investment, and you should not expect to be protected if something goes wrong.

General risks common to all crypto assets

What are the risks associated with Cryptoassets generally?

• Volatility and Liquidity Risks: Cryptoassets are known for their high volatility which refers to rapid and significant price fluctuations that may be experienced over short periods of time. Cryptoassets markets are often driven by speculation and sentiment leading to rapid price movements based on market perceptions, positive or negative, based on news and rumours. It is essential to consider your individual risk tolerance and investment goals before engaging with Cryptoassets. During periods of high volatility, you may be unable to buy or sell any Cryptoassets.
• Nascent Technology: Blockchain technology remains in its early stages and the underlying technology continues to evolve. Technical issues, security breaches, and vulnerabilities of the underlying protocol can trigger price fluctuations. It is unclear whether the economic value or functional elements of Cryptoassets will persist over time. Additionally, the Cryptoassets ecosystem is rapidly developing in a competitive market, demand for any Cryptoassets may decrease with the entrance of a competitor or simply the inability to establish long-term value.
• Hacks: Exploitable vulnerabilities are often discovered in the source code of Cryptoassets, resulting in various issues such as impaired functionality, compromised user information, and theft of Cryptoassets. Additionally, the cryptographic foundations of any Cryptoassets may prove to be flawed or inadequate over time.
• Concentration Risks: Depending on the consensus mechanism used by a particular blockchain, If an individual or entity acquires control of more than 51% of the computing power (hash rate) utilised by a blockchain network, they would possess the ability to exploit this majority control to engage in double spending of their Cryptoassets. This is known as a “51% attack”, and, if successful, it would severely undermine confidence in public blockchain networks such as Bitcoin or Ethereum or any impacted blockchain network. Consequently, the value of the Cryptoassets impacted would likely experience a significant decline.
• Stablecoins: Stablecoins are coins are designed to maintain a fixed value relative to the denominated fiat currency. There is no assurance that a stablecoin is able to maintain its value fixed to any denominated currency in moments of extreme volatility.
• Internet and Electronic Trading Risks: Utilising an internet-based trade execution software application entails certain risks, including but not limited to potential hardware and software failures. For instance, in the event of an internet connection or equipment failure, you may encounter difficulties such as being unable to place an order, experiencing order execution deviations from your instructions, or the non-execution of your order altogether. Consequently, this may result in financial losses if the market for a specific Cryptoassets experiences a sudden drop.
• User Error: Once a Cryptoassets transaction has been executed to its respective network, or if the user sends their Cryptoassets to an incorrect wallet or network, there is no possibility to reverse the transaction. In the unfortunate event of fraudulent or accidental transactions, any resulting losses are not recoverable.
• Cyber Security: Cryptoassets platforms have faced cyberattacks and encountered technical problems that led to the loss or theft of Cryptoassets belonging to their users. Consequently, a similarly targeted cyberattack could potentially result in the theft or loss of your fiat currency or Cryptoassets. In such circumstances, it might be challenging or even impossible to recover the lost funds or assets.
• Regulatory Risks: Legislative and regulatory changes or actions at the national or international level may adversely affect the use, transfer, exchange, and value of crypto assets.
• No Investor Protection: On some exchange platforms, Cryptoassets do not benefit from the protection provided by the Financial Ombudsman Service (FOS), or the Financial Services Compensation Scheme (FSCS) if something goes wrong. You should be aware and prepared to potentially lose some of all of your money.

Stablecoins

What are they?

A stablecoin is a cryptocurrency whose value is pegged to that of an underlying fiat currency, such as the Pound Sterling, US Dollar, or Euro.

What are the risks associated with Stablecoins?

• Counterparty Risk: These assets are backed by collateral (e.g., fiat currency), and relying on a third party to maintain the collateral introduces risk. This risk emerges if the party faces insolvency or fails to maintain the required collateral.
• Redemption Risk: When an asset claims redeemability for underlying collateral, there is a risk that the redemption process will not unfold as expected. This risk is particularly evident during periods of market volatility or operational challenges.
• Collateral Risk: The stability of the asset is subject to the risk that the value of the collateral, which may be another type(s) of asset or Cryptoassets(s), may decline or become volatile.
• FX Risk: Many Stablecoins are denominated in US dollars, exposing you to fluctuations in the exchange rate between USD and other fiat currencies.
• Algorithm Risk: If the asset relies on an algorithm to maintain stability (e.g., by adjusting supply based on demand), there is a risk that the algorithm will fail or behave unexpectedly. This scenario could cause the asset to lose its stability and even its entire value.

Meme Coins

Meme coins, derive value from community interest and online trends, often without any intrinsic value or utility.

What are the risks associated with Meme coins?

• Volatility Risk: Meme coins are prone to substantial and unpredictable price changes, often experiencing rapid fluctuations. Social media trends and celebrity endorsements can significantly influence their value, diverging from traditional investment fundamentals.
• Lack of Utility: Meme coins can sometimes lack intrinsic value or utility, relying more on community interest, online trends, and speculative trading to determine their worth.
• Market Manipulation: Meme coins face an elevated risk of market manipulation, including “pump-and-dump” schemes, where prices are artificially inflated before a sudden crash.
• Lack of Transparency: Information about meme coins, such as details about development teams, goals, and financials, is often limited. This lack of transparency poses challenges in evaluating the credibility and potential of a meme coin accurately.
• Emotional Investing: Meme coins often evoke intense emotional reactions from investors, leading to impulsive decisions. This emotional trading activity has the potential to magnify losses in the market.

Defi tokens

Decentralised Finance (DeFi) tokens, such as UNI and AAVE, are linked to financial applications and protocols on decentralised blockchains.

What are the risks associated with Defi tokens?

• Smart Contract Risk: DeFi’s reliance on smart contracts exposes it to risks. Even a minor coding error or oversight could lead to the exploitation of a contract, potentially resulting in significant losses for DeFi tokens.
• Regulatory Risk: Operating in a decentralised manner, DeFi often lacks intermediaries or financial crime controls. Regulatory bodies across jurisdictions might introduce new regulations, affecting the use, value, or legality of certain DeFi protocols or assets.
• Rug-Pulls/Exit Scams: Some DeFi projects, initiated by anonymous or pseudonymous teams, heighten the risk of “rug pulls.” In such cases, developers abandon the project, withdrawing funds and leaving investors with worthless tokens.
• Data/Oracle Risk: DeFi protocols often rely on external data sources or “oracles”. Manipulation or inaccuracies in these data sources can lead to unintended financial outcomes within the protocols.
• Protocol Complexity: The intricate nature of some DeFi protocols can pose challenges for average users to fully comprehend the mechanisms and associated risks.
• Lack of Liquidity: Certain coins within DeFi exhibit very low liquidity, meaning slight changes in supply and demand can result in sharp price movements.

Cryptoassets Risk Summary

Cryptoassets also referred to as cryptocurrency, are a digital representation of value that function as a medium of exchange, a unit of account, or a store of value. Cryptoassets are not legal tender, are not backed by the government or a central bank and generally have no underlying assets, revenue stream, or other sources of value tied to fiat currency or other assets.

Their value is derived from market dynamics and has historically been more volatile relative to fiat currency and other assets. The unpredictability of the price of cryptocurrency relative to fiat currency may result in significant loss over a short period of time.

The value of Cryptoassets may be derived from the continued willingness of market participants to exchange fiat currency for cryptocurrency, which may result in the potential for permanent and total loss of value of a particular cryptocurrency should the market for that cryptocurrency disappear. In certain cases, it may be difficult or impossible to liquidate a position quickly at a reasonable price due to various market factors, including illiquidity or actions by trading facilities.

Legislative and regulatory changes or actions at the national or international level may adversely affect the use, transfer, exchange, and value of cryptocurrencies. Several federal agencies have also published advisory documents surrounding the risks of virtual currency.

Some Cryptoassets transactions shall be deemed to be made when recorded on a public ledger, which is not necessarily the date or time that the customer initiates the transaction. Cryptoassets ownership is often determined by a decentralised public ledger that associates an amount of cryptocurrency with a unique address defined by a public cryptographic key.

A private cryptographic key is required to transfer cryptocurrency from one address to another. Anyone with access to the private key associated with the address can transfer the associated cryptocurrency. Cryptoassets transfers generally cannot be cancelled or reversed and the identity of the holder of the private key associated with any address can be difficult, if not impossible, to ascertain.

The nature of Cryptoassets may lead to an increased risk of fraud or cyber-attack. If you are using cryptocurrencies to purchase goods or services, most exchange platforms have no visibility into the sellers and cannot control delivery, quality, safety, or legality. Losses due to fraudulent or accidental transactions may not be recoverable.

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