Lynn Johannson, Advisor, Sustainability and ESG
January 4th, 2024
Lynn Johannson, President of E2 Management Corporation and Catalyst for THE Collaboration
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10 Insights from IOSCO’s Report for Crypto Investors
Crypto Report | Oct 17, 2024
Image: Investor Education on Crypto Assets (IOSCO)
What You Need to Know about IOSCO's Report on Crypto-Assets
The International Organization of Securities Commissions, otherwise known as IOSCO, published a report called 'Investor Education on Crypto-Assets' (64 page PDF) that looks at how more retail people are getting involved in crypto markets, the risks they face, and what regulators are doing to protect them. This post provides an overview of 10 key lessons that investors should know about, especially younger or new investors that are jumping into crypto markets without fully understanding how it works. From sudden price crashes to fraudulent traps and other pitfalls. By knowing what to look out for, investors can make smarter and safer choices. This post highlights 10 quotable takeaways from the report and their implications.
1. Crypto Market Volatility
Virtually everyone who has invested in crypto should understand by now that crypto markets and the prices that underpin them are volatile, so investors that can't stomach it should really stick to more conservative investment options. The report talks about the crypto winter of 2022 where Bitcoin, for example, dropped from it's peak of over $67,000 in 2021 to around $16,000 by November 2022. Such a severe price decline can have serious consequences for retail investors.
👉 According to survey responders, many investors entered the market without fully understanding the risks. Only a small portion of surveyed investors believed their investments were at high risk (even after such market crashes), preferring to believe that markets and prices would rebound to all time highs in the future.
2. High-profile Collapses
The collapse of enterprise crypto companies like TerraUSD and FTX in 2022 caused billions of dollars in losses for everyday investors. In Canada, a survey found that many people had money in these platforms and couldn't access their funds once the companies failed. Let's also not forget about Canada's own debacle in the QuadrigaCX failure (fraud) back in 2019 where investors were also unable to get access to their funds.
See: 5 Fintech Failures and Lessons to Learn From
👉 Survey says, more than 40% of retail investors in the U.S. and Canada were worried about the lack of rules and how vulnerable their money was with these platforms.
3. Young Investors and Social Media Influence
Many people investing in crypto are younger, especially those under 40. In the U.S., 62% of investors under 35 had thought about investing in crypto, and over half of them already had. By comparison, only 7% of people over 55 had invested in crypto. A similar trend was seen in Canada where younger investors were more likely to rely on advice from social media and friends.
👉 Platforms like TikTok and Instagram were popular sources of information for younger investors but often the advice they get from these platforms is not reliable which leads to making poorly informed decisions and taking unnecessary risks.
4. Fraud and Scams
Fraud is still a big problem in the crypto market. The report shows that in the U.S. alone crypto scams caused over $1 billion in losses in 2022. One common scam worth highlighting is called "pig butchering" where unknown predators contact people on social media, get them to trust them eventually, and then trick them into participating in fake investment scams. See NASAA on Crypto scams
See: Is Web3 Ready for Social Commerce Adoption?
👉 More than 60% of those scammed said they were targeted through social media. More education is needed to help investors spot warning signs to avoid being scammed.
5. Regulatory Changes to Protect Investors
To address the increasing risks in crypto markets many countries have put stronger rules in place. In the European Union, the Markets in Crypto-Assets (MiCA) regulation created a single set of rules for crypto providing more protection for investors. In the U.S., the SEC has taken a regulation by enforcement approach by going after unregistered exchanges and cracking down on scams, leading to record setting enforcement actions (many including some vocal SEC commissioners are against also see nothing but crickets). In Canada, the Canadian Securities Administrators are requiring that all crypto trading platforms register in compliance by December 31, 2024 (also see the OSCs staff notice and all crypto platforms to register as investment dealers)
👉 Survey results show that about 40% of retail investors in the U.S. and Canada didn’t know about the protections offered by regulated platforms.
6. Overconfidence in Knowledge
Many investors think they know more about the crypto market than they actually do. In a Canadian survey, 70% of investors said they felt knowledgeable about crypto, but only 32% could correctly explain how blockchain technology works.
👉 This difference between what people think they know and what they actually know can lead to risky investment choices. Investors might not fully understand important technical risks like how private keys or digital wallets work, making their investments less secure.
7. Social Media's Role in Driving Investment Decisions
In both Canada and the U.S. more than 50% of investors in some age groups said they get most of their investment advice from social media influencers and online forums and communities. Many also said they rely on advice from friends and family instead of professional financial advisors or experts.
See: Resurgence of Cryptoassets in Canada’s Investment Landscape
👉 The reliance on casual advice makes it easier for investors to make bad decisions. Misinformation can spread quickly on these platforms that often leads to hype around risky investments that may not have much real value.
8. Small Investments, Big Risks
Many retail investors are drawn to crypto because it seems easier to start with small amounts of money (especially lower income earners). A European survey found that 64% of households investing in crypto earned less than €1,500 per month. This group is often the most financially vulnerable but yet they are the most likely to invest in risky and speculative assets.
👉 Even though crypto might seem accessible, small investments can still lead to big losses in such a volatile (and not fully regulated) market. The report highlights the need for greater awareness of the risks that come with investing small amounts into crypto.
9. Viewing Crypto as a Short-term Gamble
In Canada, approximately 28% of investors saw crypto as a way to make quick money (fast gamble), instead of thinking about it as a longer term investment. The reality is that short term thinking often leads to emotional and impulsive decisions, especially as prices swing wildly.
👉 It’s important to teach investors about strategic long-term planning and diversifying their investments across different asset types. Crypto investments should be taken seriously as opposed to treating it like a lottery ticket.
10. The Need for Comprehensive Education
Even though crypto is becoming more popular, many retail investors still don’t have a good understanding of how the market works. Surveys from different countries found that over 60% of investors didn’t fully understand the risks of fraud, price volatility, or whether the platforms they were using were properly regulated.
See: WEF Insights On Coordinating Global Crypto Regulation
👉 There’s a real need for comprehensive yet easy to understand educational programs to help people learn more about the risks and opportunities in crypto markets. Countries like France and Canada have started campaigns to fill these gaps, especially for younger investors who are more likely to be misinformed.
Conclusion
Crypto markets can be exciting for retail investors but as IOSCO's report shows much work still needs to be done to educate investors (especially new and younger retail investors) that it's a high risk investment. From market volatility to high profile collapses, massive fraud and the pitfalls of social media advice and more.
Download the 64 page PDF report 'Education for Crypto Invetsors' --> here
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