Around 2.3 million UK adults - or 1 in 25 people- now hold cryptocurrencies, up from 1.9 million last year.
New research from the Financial Conduct Authority (FCA) revealed that investing in crypto is becoming more commonplace as attitudes towards these decentralised digital currencies change.
Just under 4 in 10 cryptocurrency users regard their investments as a gamble, down from just under half of the users last year.
However, the overall understanding of how cryptocurrencies work is falling, the FCA found. Out of more than 2,500 users surveyed for the research, only 1823 could correctly identify the definition of a cryptocurrency from a list of statements.
In addition, only 1 in 10 reported having seen FCA consumer warnings that investors should be prepared to lose any money they invest in cryptocurrencies.
Sheldon Mills, FCA's Executive Director, Consumers and Competition, said:
The market has continued to grow, and some investors have benefitted as prices have risen.
However customers need to understand that because these products are largely unregulated, they are unlikely to have access to the FSCS or the Financial Ombudsman Service if something goes wrong.
If consumers invest in these types of products, they should be prepared to lose all their money.
Although the majority of cryptocurrency investors said they were aware their investments are not protected, 12% believed otherwise, said the FCA.
Among those who had seen the warning, opinions were divided, with 43% of respondents saying it would put them off investing in cryptocurrency in future.
The FCA also reported that the average investment was £300, and most investors were higher-than-average earners- and so better able to weather losses on the volatile currency markets.
Laith Khalaf, financial analyst at AJ Bell, said that while a 'high proportion' investors are using cryptocurrencies sensibly and 'moderately', some investors are 'careless':
The fact that 14% of crypto buyers have borrowed to invest is simply terrifying. The extreme volatility and uncertain long-term outlook for crypto mean holdings can be wiped out, leaving borrowers with nothing but their debt as a memento.
Around one in five crypto buyers said they were driven by FOMO, which is never a good motivation for financial decisions, he said.
Buying cryptocurrency is a dangerous financial activity, and while many consumers appear to understand the risks, some are carelessly playing with fire.
Khalaf pointed to the slow uptake of crypto by mainstream lenders and retail, and the heavy carbon footprint of crypto mining (through which new coins are generated), as drawbacks for the long-term viability of cryptocurrencies.
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