Investors influenced by friends and social media celebrities are buying Bitcoin and other cryptoassets in an attempt to "get rich quick".
But many are putting in their money, with no protection against losses, without fully understanding what they are doing.
The findings are in research published by the Financial Conduct Authority.
Huge volatility has led to warnings about investing in crypto. One industry group has called for regulation.
A heavily-promoted industry in cryptoassets has built up in recent years, with Bitcoin the most popular.
Despite the hype, very few people actually put their money into this kind of unregulated investment, according to the Financial Conduct Authority's research. Its findings suggested:
- Only 3% of those asked in the FCA's survey had ever bought cryptocurrency such as Bitcoin
- Those who do buy cryptocurrency tend to spend less than £200
- Just one in 100 people who have not done so said they would in the future
- Cryptocurrency is primarily understood by men aged 20 to 44, but 73% of all those asked said they could not define it
"Despite this lack of understanding, the cryptoasset owners interviewed were often looking for ways to 'get rich quick' citing friends, acquaintances and social media influencers as key motivations for buying cryptoassets," the FCA said.
Huge volatility in these investments have led to warnings across the world of the risks involved.
"Cryptoassets are complex, volatile products - consumers investing in them should be prepared to lose all of their money," said Christopher Woolard, of the FCA.
However, the FCA concluded that - with relatively small sums involved - the overall scale of harm from volatility in value might not have been as high as previously feared.
Owing to the lack of regulation, there is no compensation or protection for investors if things go wrong.
Last year, the Treasury Committee of MPs said that Bitcoin and other digital currencies were a "Wild West industry" which needed to be regulated to protect investors.
It said that risks of hacking and money-laundering were also concerns.
CryptoUK, which was set up last year as a self-regulatory body for the crypto-currency industry, agreed that there should be official oversight.
"CryptoUK has consistently argued that cryptocurrency investment should be regulated in the UK, to provide greater certainty and to adequately protect consumers," said Iqbal Gandham, who chairs the group.
"We are pleased that the government agrees with our approach, and are actively working alongside the FCA and Treasury to help deliver a proportionate and well-designed UK regulatory regime which matches the best of other jurisdictions across the globe."