Cryptocurrency losses causing bankruptcies

Losses through cryptocurrency speculation are leading to UK personal insolvencies.

We have seen a steep rise in “cryptocurrency losses” written down as a primary reason for personal insolvency on reports being sent to creditors of those bankrupt.

Paul Rouse, a Partner in our Restructuring team notes that amateur traders can be caught out by the volatility of cryptocurrencies, and in some cases, they are losing more than they can afford to.

He has begun to notice cryptocurrency trading in the files being received at Mazars on individual insolvencies. This was not the case as recently as six months ago.

The pattern beginning to emerge is that amateur traders are successful in their initial small trades but then start betting bigger and bigger positions until they are caught out.

Cryptocurrency volatility

The volatility of cryptocurrencies can be exacerbated if the amateur trading is trading on margin (i.e. leveraging their position). If the trader already has a weak financial position (such as credit card debts) then it might not take a large cryptocurrency loss to make them insolvent.

The cryptocurrency market in the UK is significant, with 2.5 million people having purchased crypto-assets according to the FCA. The simplification of trading apps has increased ease of access for buyers allowing more traders to join the market which can drive the price up until there is a market correction.

During the lockdown, people may have been drawn to speculate on cryptocurrency in their free time as a form of gambling-like entertainment. There is a danger that, like traditional forms of gambling, losses may quickly spiral out of control. Traders may continue to make larger bets in an attempt to regain previous losses, and this may end in debt and eventually insolvency.

The trend to date is that cryptocurrency speculation is the latest in a long line of high-risk trading that has seen retail investors get out of their depths including spot trading in FOREX, day trading in dot.com shares, CFDs, and binary options trading.

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