Fewer than one in 10 potential buyers of cryptocurrencies have heard warnings from the UK financial regulator about the dangers of betting on digital assets, while the number of adults who hold them has risen sharply.

Research released on Thursday showed that the Financial Conduct Authority found that general understanding of cryptos, including among those invested in the assets, had dropped as the popularity of the digital coins has increased.

More than 4 per cent of adults in the UK, or 2.3m people, owned a cryptocurrency in January, the FCA found, an increase of close to half a million from the previous year. More consumers have since taken the plunge, as bitcoin prices more than doubled from January to a peak in April before easing back.

More than three-quarters of UK adults are now aware of cryptos and many have taken a punt on digital coins during the coronavirus lockdowns, the FCA said. But out of that group, 30 per cent could not correctly pick the definition of cryptocurrencies from a list of statements, a decline in understanding of 4 percentage points compared with the year before.

“Despite more people having now heard about cryptocurrency, the overall level of understanding has fallen. This suggests there may be a risk of consumers engaging with cryptocurrency without a clear understanding of it,” the regulator said.

Main reasons for buying cryptocurrencies

The FCA, along with the US Securities and Exchange Commission and other regulators around the world, have tried to alert the public to the risks of speculation in digital assets while they work to develop standards to govern the crypto sector. But in the UK, the FCA’s repeated warnings that anyone investing in cryptocurrencies “should be prepared to lose all their money” has failed to break through.

Among the fraction of people who saw the warning, the reaction was split: 44 per cent said it had no influence on their intention of investing in crypto while 43 per cent said it would discourage them from doing so.

The UK regulator also highlighted a significant minority of crypto investors who were running particularly high risks. About 15 per cent of crypto owners used borrowed money to fund their purchases, which could leave them underwater if their bets turned bad.

A similar percentage incorrectly believed that crypto investment enjoyed similar protections to traditional financial products offered to retail investors, such as access to compensation schemes.

Laith Khalaf, financial analyst at AJ Bell, said the number of crypto buyers using leverage was “simply terrifying”.

Social media has played a key role in how investors learnt about cryptocurrencies, the study found. Reddit and other online forums were the most common places people had turned for more information before deciding whether to invest.

A separate national study by AJ Bell in June estimated that the number of crypto buyers had risen to 7 per cent of UK adults over the previous 12 months.

A growing share of buyers see crypto as a form of investment, the FCA found, with nearly half putting money into digital assets as an alternative to traditional allocations, or as a part of their broader investment strategy. But speculation was also a powerful motive. About 40 per cent of crypto holders likened their purchase to a “gamble” while about one in five expected to make a quick profit.

“There is a danger that inexperienced investors get burnt if they go full throttle into crypto assets in the expectation of a repeat of the rapid price increases seen in bitcoin and other cryptocurrencies recently,” said Jessica Galletley, head of research at personal finance website Boring Money, which had noted a sharp increase in interest in cryptocurrencies over the past 18 months, particularly among men.

The profile of crypto owners remains skewed towards men over 35, the FCA noted.

At present, the watchdog only regulates cryptocurrency providers for anti-money laundering, but it has signalled serious concerns about harm to consumers. The regulator’s task is complicated by the large share of consumers, 86 per cent, who conduct their crypto dealing with offshore exchanges.

It recently warned that a significant number of crypto businesses were not meeting anti-money laundering standards, underscoring the struggle of bringing established digital asset groups in line with the rules. Just five companies have fully registered with the FCA 18 months after the process began, while dozens of applications are pending.

US financial authorities have also signalled that they are preparing to take a more active role in regulating the $1.5tn cryptocurrency market as concern grows that a lack of proper oversight risks harming savers and investors.

Gary Gensler, chair of the SEC, told a House committee in May that there were “gaps in our current system”, pointing to a potential need for legislation to specify which regulator should oversee crypto exchanges. Gensler said his aim was to bring “similar protections to the exchanges where you trade crypto assets as you might expect at the New York Stock Exchange or Nasdaq”.