Investor interest in cryptocurrency reached fever pitch but there are fears the bubble may be about to burst.

The International Monetary Fund was reported by Forbes as warning that the “rapid growth” of bitcoin and cryptocurrency assets could create “new vulnerabilities in the international financial system” as the world’s banks adjust to the recent bitcoin and blockchain boom.

Forbes added that Bitcoin and other cryptocurrencies, including Ripple Lab’s XRP token, ethereum, litecoin, EOS, and stellar, were coming under increasing examination by the traditional financial system to gauge how they might be integrated as both investment tools and ways to move money across borders more quickly and cheaply.

Earlier this year the Financial Conduct Authority (FCA) released a statement saying that cryptocurrencies were not regulated provided they were not part of other regulated products or services.

When they are used as a financial instrument, for example, their use would have to comply with the Markets in Financial Instruments Directive II (MIFID II).

So although the FCA does not consider cryptocurrencies to be currencies or commodities for regulatory purposes under MiFID II companies Companies conducting regulated activities in cryptocurrency derivatives must, therefore, comply with all applicable rules in the FCA’s Handbook and any relevant provisions in directly applicable European Union regulations.

Adviser Scott Gallacher explains the pros and cons of investing in digital currency.

What is cryptocurrency?

There are around 4,000 different types of cryptocurrency of which Bitcoin is the most well-known. Cryptocurrency is essentially a form of digital money.

How do I get them?

Much like traditional money, you can gain Bitcoins by:

Selling goods or services and being paid in Bitcoins,

buying Bitcoins via an online Bitcoin exchange, or

‘mining’ them via your computer.

To ‘mine’ for Bitcoins you use your computer to solve complex calculations which you are then rewarded for with Bitcoins. This might sound a very easy way to make money but unfortunately it’s not as simple as it sounds. Without specialist computer hardware you may find that you’re spending more on your electricity bill powering your PC than you are earning in Bitcoins.

What can I do with my Bitcoins?

Again, like traditional money you can:

Spend your Bitcoins buying goods or services – although you’ll need to find a store (online or physical) that accepts them.

Exchange them for another currency – for example Sterling, US Dollars, Euros, etc. via an online Bitcoin exchange.

Hold on to them – they can be stored online or on your computer.

What are the pros of cryptocurrency?

The key advantage is being able to store, receive and transfer money outside the traditional banking system. This can offer potential cost savings and, due to the encryption of Bitcoins, could arguably be more secure.

What are the cons of cryptocurrency?

Bitcoin doesn’t have the same recognition and acceptance as traditional currency. As a result it is somewhat harder to spend it without first exchanging it into one of the traditional currencies.

Also, even though it is secured electronically you still need to keep it safe. A couple of years ago someone binned his old hard drive, forgetting he had Bitcoins on it, and despite several weeks searching the local tip he effectively ‘lost’ £4 million!

Currently the biggest downside to Bitcoin is the volatility in its price. With traditional currencies they have an accepted ‘value’ by almost everyone; consequently almost everyone in the UK knows what a pound will buy and, Brexit referendum result aside, it’s value doesn’t tend to move too dramatically day to day.

The price of Bitcoins, on the other hand, has been very volatile. Whilst this has lead to the price rising sharply there have also been very sharp falls; consequently Bitcoins are not for the faint hearted.

Finally there are concerns that national governments could in effect ban Bitcoin or other crypto-currency which might not be as difficult as it sounds as for cryptocurrency to have any real value they must be able to transact and/or convert with traditional currencies, goods and services. Consequently any government ‘ban’ could wipe out the value of crypto-currencies.

Should I be buying Bitcoins?

Bitcoin is not a traditional investment and might better be categorised as speculation. Consequently I’d urge extreme caution before considering purchasing Bitcoin or any other crypto-currency. If you do wish to invest in it, it should form part of a diversified portfolio, rather than be the portfolio itself.

Instead of Bitcoins people might be much better off speaking to a local IFA – via Vouchedfor or Unbiased – who will be able to recommend a investment strategy tailored to their own particular attitude towards risk.

Scott Gallacher is a director and chartered financial planner at Rowley Turton, he also blogs for the VouchedFor website.