Bitcoin is the best investment I’ve ever made – up 600% in a few months – and I’d never buy it again. These were the early-ish days of cryptocurrencies and, of course, I’d have been looking at returns in the tens of thousands of percent if I’d held on for longer then, like everyone plans to, sold at the peak. 
But I realised in those few months that cryptocurrencies weren’t for me. I’d log into my Bitcoin wallet and see the value jumping around, but there never seemed to a convincing reason why it was making these moves. To be honest, I didn’t understand it – the technology, the market moves, the passion of its advocates – and saw it as a crapshoot, a spin of the wheel.
There were other issues as well. The violent swings in value caused me to check my Bitcoin portfolio much more frequently than my conventional investments. When it was rising, there was the temptation to buy more to grab more upside rather than consider its fair value. The reaction to any sell-off was ‘it must go up again soon’, with no real reason behind it.
Over the past decade or so, cryptocurrencies have moved to the brink of the mainstream. The Financial Conduct Authority (FCA) found that around 10% of consumers have invested in crypto, double the level from one year earlier.
Crypto is often labelled as the ‘Wild West’ of finance, but it was clear that some kind of sheriff would have to ride into town eventually. There’s been increasing regulatory attention on the sector recently and yesterday the FCA hitched up its horse and strode through the saloon doors.
The watchdog is bringing in a new regulatory regime for crypto, including marketing rules that create a “24-hour cooling-off period”, require companies to use risk warnings and ban “refer a friend” incentives. Cryptoassets themselves will remain unregulated.
FCA consumers and competition executive director Sheldon Mills said: “It is up to people to decide whether they buy crypto. Those who invest should be prepared to lose all their money.”
There’s little disagreement that something needed to be done about how the sector is marketed. All too often, it is painted as a cutting-edge shortcut to vast riches with the focus on its potential for spectacular gains rather than the devasting crashes that are also common.
However, there are worries that regulating crypto as if it were a conventional investment could create a ‘halo effect’ that accidentally legitimises the asset class. The FCA’s research found that 28% of non-cryptoasset owners would be more likely to buy crypto if it were regulated.
These concerns are shared by the Treasury Committee of MPs, which believes cryptocurrencies pose significant risks to consumers and has called for them to be regulated as a form of gambling, rather than investing.
Harriett Baldwin, chair of the Treasury Committee, said last month: “With no intrinsic value, huge price volatility and no discernible social good, consumer trading of cryptocurrencies like Bitcoin more closely resembles gambling than a financial service and should be regulated as such.”
There’s something to be said for this view, especially as the FCA’s research found the most common reason for buying cryptoassets – given by 40% of those surveyed – was “as a gamble”.
Research has shown links between the psychological drivers of cryptocurrency investing and gambling. A 2020 study published in the Addictive Behaviors journal discovered that problem gamblers were more likely to trade in cryptocurrency. The excitement and uncertainty tied to both activities produce a dopamine rush, which can lead to addictive behaviour.
It’s essential to remember that every financial decision should ideally be based on thorough research, sound judgment and risk assessment. When these principles are replaced by hope and speculation, investing quickly turns into a form of gambling.
The rise of this new asset class suggests we redefine the boundaries of investment, gambling and financial regulation. Financial authorities could have a lot to learn from experts in gambling addiction on how they can mitigate the risk of excessive speculation and potential financial harm.
A key takeaway from the realm of gambling regulation is the importance of user protection. This industry, while far from perfect, has implemented measures to prevent problem gambling, such as setting betting limits, offering self-exclusion programmes and providing resources for those struggling with addiction. Drawing from this, regulators can incorporate similar safeguards in the realm of cryptocurrency trading.
Cryptocurrency is unlikely to disappear. It represents a significant shift in how we view and handle money, and it’s critical that we adapt our regulatory framework to reflect this. By leaning on the expertise of those already tackling similar challenges posed by gambling, maybe we can create a safer environment for those choosing to invest in this new and volatile asset class.