The prices of virtual goods and products, like real goods and products, constantly fluctuate over time. Any currency, virtual or otherwise, could be subject to large swings in value and at any time might become worthless. As such, the value of your holding may increase or decrease over time. With any type of market-based trading, buying or selling, there is an inherent risk that losses will occur. It follows that you should not hold money you cannot afford to lose in bitcoin or alternative cryptocurrencies.
Trading in virtual currencies brings special risks not typically shared with trading in official, recognised currencies or goods or commodities in a market. Unlike most recognised currencies backed by governments or other legal entities, or commodities such as gold and silver, bitcoin, for example, is backed and supported by technology and trust. In this way it is a unique kind of ‘fiat’ currency. There exists no central bank or dedicated authority that can take corrective measures, such as creating or issuing more bitcoin, in order to protect the digital currency’s value in a crisis.
The price of cryptocurrencies is susceptible to bubbles or loss of confidence, which could collapse demand relative to supply, having an adverse affect on the price. For example, confidence in bitcoin could disintegrate because of unexpected changes imposed by software developers or others, the risk of state regulation, the creation of superior competing alternative currencies, or a deflationary or inflationary spiral. Confidence might also collapse because of technical problems: if the partial anonymity of the system is compromised, if bitcoin is lost or stolen, or if hackers or governments are able to prevent any transactions from settling.
Cryptocurrency is an autonomous and, as far as the current UK regime is concerned, unregulated worldwide system of currency firms and individuals linked through technology. At their own discretion traders put their trust in a digital, decentralised and partially anonymous system that relies on peer-to-peer networking and cryptography to maintain its integrity.
Given the above, you should carefully assess whether your financial situation and tolerance for risk is suitable for buying, selling or trading cryptocurrencies.
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