Risk of specific cryptoassets and products

Estimated reading time: 2 min

Remember, not all cryptoassets and products are alike. Before investing, you should ensure you understand the specific risks involved.

Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.

Stablecoins

Risks associated with stablecoins

CoinJar may from time to time support stablecoins, which are a class of digital currencies which generally purport to be backed by, or aim to maintain stable value relative to, another asset including fiat currency or commodities such as silver or gold. In particular, there is a risk that any particular stablecoin may not hold their value as against any fiat currency; or may not hold their value as against any other asset.

This risk may crystallise as follows:

• Depegging events: Depegging events may occur with stablecoins that fail to maintain adequate controls and risk mitigants. A depegging event is when the value of the stablecoin no longer matches the value of the underlying asset. This could result in a loss of some or all of your investment.

• Counterparty risk: Counterparty risk arises when an asset is backed by collateral, involving a third party maintaining the collateral, which introduces risk if the party becomes insolvent or fails to maintain it.

• Redemption risk: Redemption risk refers to the possibility that an asset's ability to be redeemed for underlying collateral may not be as anticipated during market fluctuations or operational issues.

• Collateral risk: Collateral risk refers to the possibility of the collateral's value declining or becoming volatile, potentially impacting the asset's stability, particularly when it is another crypto-asset.

• Exchange rate fluctuations: Stablecoins, often denominated in US Dollars, expose investors to fluctuations in the USD:GBP exchange rate.

• Algorithmic risk: Algorithm risk refers to the possibility of an asset's stability being compromised due to unexpected failure or behaviour of the underlying algorithm, potentially leading to loss of value.

CoinJar Bundles

Risks associated with CoinJar Bundles

CoinJar Bundles is a service offered by CoinJar which allows users to more easily diversify their portfolio by investing in baskets of cryptocurrencies with pre-defined allocations, either on a proportional basis or a cap-adjusted basis ("Bundles").

When you add funds into a Bundle, you instruct us to initiate multiple purchases of cryptocurrencies on your behalf in accordance with the allocations indicated to you within the Bundle.

The risks below should be borne in mind before making a decision to add funds into a CoinJar Bundle:

• Managing a portfolio containing a larger basket of cryptocurrencies can be more complex and may have higher associated costs involved when performing certain actions. For example, withdrawing many individual cryptocurrencies to your wallet may incur many times the network fees as opposed to a single cryptocurrency.

• The risks associated with a single asset are also relevant in determining the risks associated with a basket of cryptocurrencies. Using a bundle investment strategy does not minimise that risk. You should carefully consider and understand the make-up of the underlying cryptocurrencies within each Bundle before purchasing any Bundle.

Wrapped Tokens

Risks Associated With Wrapped Tokens

CoinJar offers certain wrapped Tokens such as Wrapped BTC (WBTC) which stems from DeFi. Pegged to the same value as Bitcoin itself, WBTC is a way of representing Bitcoin ownership on the Ethereum network (i.e. you lock Bitcoin in a smart contract and receive an equivalent amount of WBTC in return).

These wrapped tokens carry the following risks:

• Counterparty risk refers to the possibility that the parties involved in a financial transaction, like the issuer, custodian or reserve manager, fail to fulfill their obligations. With wrapped tokens, there is a counterparty risk that the entities responsible for selecting, holding, and managing the underlying collateral assets do not adequately perform their duties.

• Centralisation risk stems from wrapped tokens being issued by a single central authority, like a company, rather than through decentralisation. While the tokens themselves may be interchangeable, they are not strictly decentralised.

• Regulatory risks involve the possibility of implementing new laws or regulations that restrict or prohibit wrapped tokens, their issuance, trading, or redemption.

• Technical risks refer to the possibility of smart contract bugs, hacking attempts, network congestion, or other issues. It can impact the wrapped tokens or the blockchains they trade on. Like all digital assets, wrapped tokens depend on functioning technology infrastructure and software.

Meme Coins

Risks Associated With Meme Coins

‘Meme coins’ (e.g. DOGE, SHIB, PEPE) are crypto-assets whose value is driven primarily by community interest and online trends.

These meme coins carry the following risks:

• Volatility risk: Meme coins can have extreme price volatility, often experiencing rapid and unpredictable price fluctuations within short periods. The value of meme coins can be influenced by social media trends, celebrity endorsements, and other factors unrelated to traditional investment fundamentals.

• Lack of utility: Meme coins often lack intrinsic value or utility, being primarily driven by community interest, online trends, and speculative trading.

• Market manipulation: Meme coins may be susceptible to increased risk of market manipulation including ‘pump-and-dump’ schemes, where the price is artificially inflated followed by a sudden crash.

• Lack of transparency: Meme coins may have limited available information about their development teams, goals, and financials. This lack of transparency can make it challenging to assess the credibility and potential of a meme coin accurately.

• Emotional investing: Meme coins often garner strong emotional reactions from investors, leading to impulsive decisions. Emotional trading activity can amplify losses.

DeFi Tokens

Risks Associated With DeFi Tokens

Decentralised Finance (or ‘DeFi’) tokens (e.g. UNI, AAVE) are crypto-assets linked to financial applications and protocols built on decentralised blockchain technology.

These DeFi tokens carry the following risks:

• Smart contract risk: DeFi relies heavily on smart contracts. Even a minor coding error or oversight can lead to a contract being exploited, potentially resulting in significant losses for DeFi tokens.

• Regulatory risk: DeFi operates in a decentralized manner, often without intermediaries or financial crime controls. Regulatory bodies across jurisdictions might introduce new regulations impacting the use, value, or legality of certain DeFi protocols or assets. For example, the Perpetual Protocol (PERP) and Quickstop (QUICK) protocols may be accessible in jurisdictions where some or all the available activity may need to be regulated now or in the future. If a regulator deemed the activity to be in breach of regulation, this could seriously impact token value.

• Rug-pulls / Exit scams: Some DeFi projects might be launched by anonymous or pseudonymous teams, increasing the risk of "rug pulls" where developers abandon the project and withdraw funds, leaving investors with worthless tokens.

• Data/oracle risk: DeFi protocols often rely on external data sources or ‘oracles’. Manipulation or inaccuracies in these data sources can lead to unintended financial outcomes within the protocols.

• Protocol complexity: The complexity of some DeFi protocols can make it difficult for average users to fully understand the mechanisms and associated risks.