Watchdog blames social media ‘hype’ and competitiveness for younger investors’ bets on crypto
Three quarters of younger investors in the UK who place their bets on high-risk products, such as cryptocurrencies, say they are driven by “competition” with friends and their own past investments, according to new research from the FCA.
Of the 1000 UK younger investors that the FCA surveyed between the ages of 18 and 40 years old, over two-thirds (68 per cent) likened placing their money in a high-risk investment to gambling.
Investors that made a wager on high-risk assets like cryptocurrencies were looking for fast returns, and few were investing for the long haul. Just one in five (21 per cent) of respondents were considering holding their most recent investment for more than a year, and less than one in ten (8 per cent) for more than five years.
“We are seeing more people chasing high returns. But high returns can mean higher risks,” said Sarah Pritchard, Executive Director of Markets at the FCA.
Strikingly, almost two-thirds (58 per cent) of the surveyed investors said “hype” on social media and in the news lies behinds their investment decisions.
This echoes Action Fraud’s recent revelation that it received 558 investment fraud reports in the months between April 2020 and March 2021 which referenced a ‘celebrity endorsement’.
It comes a month after the city watchdog urged investors not to take cryptocurrency advice from social media influencers, following Kim Kardashian’s paid instagram post that promoted a newly-created cryptocurrency token called Ethereum Max to her more than 250m followers.
FCA chair Charles Randall warned at the time: “Social media influencers are routinely paid by scammers to help them pump and dump new tokens on the back of pure speculation. Some influencers promote coins that turn out simply not to exist at all.”
Contrary to the short-term higher return bets on these assets that the investors opted for, 60 per cent said they preferred more stable returns than investments that rise and fall dramatically.
The regulator’s research was prompted by the pandemic-fuelled surge of more than a million UK investors who increased their holdings or a bought a high-risk investment last year.
It coincides with the watchdog’s launch of a new £11m campaign called “InvestSmart” aimed at helping consumers make better informed investment decisions that suit their financial circumstances and attitude to risk.
Of the investors surveyed that had purchased cryptocurrencies, 69 per cent erroneously believed they were regulated by the FCA.
The FCA said it was “concerned that new investors are increasingly accessing higher-risk investments which may not be right for them, or reflect their risk tolerance. ”
It comes after Action Fraud found this week that crypto fraud had caused people in the UK to lose a total of £146m so far this year – already a third higher than the whole of 2020.
But Moira O’Neill, head of personal finance at retail investment platform Interactive Investor, warned that the picture wasn’t so black and white when it comes to young investors, and that informed decisions boil down to better financial education starting in schools.
“More airtime should be given to the many young people who are completely risk averse, compromising long-term financial security,” O’Neill said, citing previous research that found that over a fifth of 18 to 34-year-olds are in low-risk pension options, potentially hampering growth prospects.
“We also need to have more balanced conversations about risk and reward, and need to be careful not to fall into avocado-style shaming of young people and their investment risk,” O’Neill added.
On the Interactive Investor platform, the youngest group of 18 to 24-year-old investors has been the strongest performing age band over the last year, owing to their high exposure to investment trusts (33 per cent), which outperform in a rising market.
When it comes to cryptoassets, an increasing number of advertisements have not been authorised by the FCA, which leaves those frauded particularly vulnerable.
Fooled investors will not have access to the Financial Ombudsman Service or the Financial Services Compensation Scheme if investments go awry, which is why the FCA has a register which potential investors can check to ensure they are dealing with an authorised firm.