Over a fifth more (21%) UK adults now hold cryptoassets compared to last year, up from 1.9m people to 2.3m, according to a consumer research study by the Financial Conduct Authority.
While 78% of adults have now heard of cryptoassets, up from 73% previously, 38% of crypto users regard them as a gamble, down from 47% last year.
At the same time, increasing numbers see them as either a complement or alternative to mainstream investments.
By contrast, the level of overall understanding of cryptocurrencies is declining, suggesting that some people who have heard of crypto may not fully understand, with only 71% correctly identified the definition of cryptocurrency from a list of statements.
Enthusiasm for cryptoassets is growing with over half of crypto users saying they have had a positive experience so far and are likely to buy more, rising from 41% to 53%.
Fewer people also regret having bought cryptocurrencies, down from 15% to 11%.
One in 10 who had heard of cryptocurrency said they are aware of consumer warnings on the FCA website.
Of these, 43% said they were discouraged from buying crypto. Most consumers recognise that crypto investments are not protected, although 12% of crypto users believe otherwise.
Sheldon Mills, FCA's executive director, consumers and competition, said: "The research highlights increased interest in cryptoassets among UK customers. The market has continued to grow, and some investors have benefitted as prices have risen.
However it is important for customers to understand that because these products are largely unregulated that if something goes wrong they are unlikely to have access to the FSCS or the Financial Ombudsman Service. If consumers invest in these types of products, they should be prepared to lose all their money."
The research is the FCA's fourth consumer research publication on cryptoassets ownership as part of its strategy to develop its thinking on the potential harms and benefits to consumers from cryptoassets and help better understand consumers' attitudes and patterns of use.
During that period the FCA issued further consumer warnings, stating that investing in cryptoassets is high risk and that investors should be prepared to lose all their money.
The FCA further said it would continue working closely with HM Treasury and other regulators, including through the UK Cryptoasset Taskforce.
The FCA's ‘Research Note: Cryptoasset consumer research 2021' was conducted in January 2021.
Laith Khalaf, financial analyst at AJ Bell, said: "The FCA's latest research on crypto paints a broadly positive picture and shows most consumers are using crypto sensibly and moderately. The average holding value is just £300 and those who have bought crypto tend to be further up the income scale, which means they have greater capacity to sustain losses. A high proportion of consumers recognise cryptocurrency is a gamble and a growing number are using it as part of a wider investment portfolio, which indicates they understand the risks and how to mitigate them.
"However, there is a dark underbelly lurking in the figures, which suggests there is still potential for widespread consumer harm. The fact that 14% of crypto buyers have borrowed to invest is simply terrifying. The extreme volatility and uncertain long-term outlook for crypto means holdings can be wiped out, leaving borrowers with nothing but their debt as a memento.
He added: "Around one in five crypto buyers said they were driven by FOMO, which is never a good motivation for financial decisions. A similar proportion said they were buying crypto instead of shares or other investments, which suggests some consumers are leapfrogging traditional assets which can help to build long term wealth.
"Buying cryptocurrency is a dangerous financial activity and while many consumers appear to understand the risks, some are carelessly playing with fire. There is no clear path for cryptocurrency to achieve widespread acceptance as a means of exchange between consumers and businesses and the carbon footprint of crypto mining has further dented its credentials as a long-term alternative to the existing monetary system."
While Rick Eling, investment director at Quilter said: "The fact that participation in cryptocurrencies is up, but understanding is down paints a troubling picture. Rather than people seeing crypto as a gamble, the research suggests they see it as an investment. To me, the rise of crypto is nothing more than a bubble fed by ignorance.
"Hats off to those that have actually made money, and there's nothing wrong with that. But cryptocurrency gambling is not investing. As responsible investors we fear for the safety of the majority, for the inexperienced, and for those whose investment expertise goes no further than an Instagram post that makes you feel like easy money exists.
"The fact of the matter is that if someone can make a lot of money quickly, they can lose the lot just as quickly. That is pure gambling. There are historic parallels between the current crypto frenzy and the ‘Railway Mania' of the 1840s. Speculators were drawn into risky assets on the basis that ‘railways will change the world'. They did indeed, but not before a self-promoting cycle based purely on speculation (and often fraud) left many families bankrupt. The fact that a new technology has great potential does not in itself insulate people from the risks of an associated asset price bubble.
Eling added: "Those interested in holding cryptoassets face a significant risk of fraud given the number of fraudulent digital tokens out there. ‘OneCoin' is perhaps the best example. This was a heavily marketed Ponzi scheme that took an estimated $4bn from the public between 2014-16 before its co-founder disappeared.
"It is understandable that people have read the many headlines surrounding bitcoin's meteoric rise over the past year and decided that they don't want to miss out, but if this is the main reason for investing then people need to re-evaluate their investment strategy.
"There needs to be much greater understanding of what constitutes investing, trading and gambling, and how language of one category gets co-opted into others. We often hear investors talk of ‘taking a punt' or ‘hedging their bets', but they're playing down how complex their work actually is. In the same vein, we hear people pushing crypto scams with the language of serious investment, including words like ‘trading system', ‘yield' and ‘volatility' when actually it is nothing more than a fraudulent scheme.
He further said: "People should instead look to get rich slowly and craft an investment strategy which takes into account how much you can realistically set aside each month to invest, your capacity for loss and appetite to risk given your investment objectives. For instance, if you are aiming to build up enough money for a deposit on a house in the near term, you may want to reduce the amount of risk you take on. Diversified, multi-asset portfolios will guard you against violent swings in asset prices and ensure your long-term objectives are achievable. Something cryptoassets are currently ill-equipped to provide."
