Cryptoassets are considered to be a high-risk investment, and it’s important - before you invest - that you’re aware of those risks. No matter whether you’re an expert in the world of web3 or a novice looking to invest a little, understanding what kind of risks you’re exposed to is essential. The risks can be broken down into different groups, some of which we’ve given below – but these aren’t exhaustive.
What are the key risks?
Putting all your money into a single business or type of investment is risky. Spreading your money across different investments makes you less dependent on any one to do well.
You should not invest more than 10% of your net assets in high-risk investments. Doing so could expose you to significant losses.
For the purposes of this statement, Net Assets do NOT include: my home (primary residence), my pension (or any pensions withdrawals), or any rights under qualifying contracts of insurance. Income does NOT include any one-off pensions withdrawals.
For the purposes of this statement, high-risk investments are: peer-to-peer (P2P) loans, investment based crowdfunding; units in a long term asset fund; cryptoassets (such as bitcoin); and unlisted debt and equity (such as in companies not listed on an exchange like London Stock Exchange).
Meme Coin Risks
Meme coins have very unique risks, and can be highly volatile. They derive their value from the “hype” around them, community interest and social media trends. Often they have no clear utility or underlying value and lack transparency about their development, goals and financial aspects.
This means Meme Coins can significantly go up in value and equally drop significantly in value. This is often driven by emotions, influencer endorsements, impulsive investing and the fear of missing out (“FOMO”). This can magnify losses.
Meme coins have been known to be susceptible to market manipulation due to “pump-and-dump” schemes – which artificially inflate the price of the token. Manipulators will then sell off their holdings resulting in a price crash.
Stablecoin Risks
Stablecoins are designed with the aim of maintaining some stability by pegging themselves to traditional fiat currencies. However, there are no guarantees that a stablecoin will maintain their value and any FX and exchange risk fluctuations the underlying currency is exposed to will also affect the stablecoin.
As multiple parties are involved in the transaction, users must place trust in these parties to have proper security and reserve management arrangements in place. Without proper reserve arrangements in place, the stablecoin may decline or become volatile.
There is also a risk related to trust – where is there is a lack of confidence in a stablecoin, it could result in a run, losing its peg against the target currency and result in redemption issues.
Regulatory Risk
You should be fully aware of the regulatory status of any cryptoasset firm you use. Mercuryo is registered in specific countries outlined on its website. Mercuryo is not authorised to, and will not, give investment advice to anyone. No protection is provided for any losses incurred while exchanging cryptoassets on Mercuryo – which is a real risk when you invest in cryptoassets. Investing through FOMO and then panic selling as prices swing low can result in significant losses that may never be regained.
The assets held with Mercuryo are not covered by investor protection schemes and dispute resolution schemes in the UK. If Mercuryo were to declare bankruptcy, you might not receive any of your investment capital held in your Mercuryo wallet.
Any profits you gain may be subject to capital gains tax and it is your responsibility to ensure you assess and pay any taxes that may be due.
Exchange Risks
Mercuryo allows its customers to exchange cryptocurrencies for fiat currencies, and also to hold cryptocurrency in a wallet. Mercuryo is not liable for exchange losses nor the performance of any cryptocurrency. Cryptoassets are highly volatile and losses may never be recouped.
Operational Risks
Cryptoassets are not immune to risk from cyber attacks, which may result in the loss of your cryptoassets.
Mercuryo invests heavily in the security features of its platform to manage and reduce the chances of any of these risks occurring. However, it is still subject to operational, technological and cyber risks. These could lead to adverse scenarios in which you may not be able to access your cryptoassets.
Wrapped Token Risks
Wrapped tokens are digital representations of other cryptocurrencies or assets. Their primary purpose is to enhance compatibility and interaction across diverse blockchain protocols. They rely on smart contracts meaning their value is pegged to the underlying asset. These contracts have vulnerabilities that can be exploited and there may be price discrepancies between the token and the underlying asset due to liquidity issues or market inefficiencies.
Wrapped tokens depend on custodians who hold the equivalent value of the native token. This means the custodian will need to have robust security arrangements and raises questions about centralisation and counterparty risk.
Defi Risks
Decentralised finance (“Defi”) tokens represent digital assets with protocols and financial apps running on decentralised technology.
Defi tokens can be subject to scams where the aim is to attract investors and then exit the project after siphoning funds. It’s important to do research before investing in Defi tokens. Defi protocols can be highly complex which can make understanding the mechanisms and risks difficult for everyday investors.
Defi operates in a decentralised manner, usually without intermediaries and limited financial crime controls, and there is always a chance future regulatory changes impact the value of the token. They operate on smart contracts – meaning they are self-executing, tamper proof and irrevocable. Any mistake, such as sending funds to the wrong address, can result in the loss of assets.
We always encourage you to do your own research before you invest in cryptocurrencies. Risks associated to cryptocurrencies are varied depending on the token
