16 Nov 2017
The United Kingdom’s Financial Conduct Authority has issued a warning against investing in complex financial structures with cryptocurrencies as the underlying investment.
Placing money in contracts for differences (CFDs), such as financial spread bets, could result in money being lost rapidly and price volatility, the FCA said.
“The value of cryptocurrencies, and therefore the value of CFDs linked to them, is extremely volatile,’ said an FCA statement, “they are vulnerable to sharp changes in price due to unexpected events or changes in market sentiment.”
“The value of some cryptocurrencies recently fell by more than 30% in a single day.”
It also stated that charges tend to be significantly higher than for other CFD products – fees can include the spread (the difference between the prices at which a firm offers to buy or sell a CFD position), and funding charges and commissions.
“Cryptocurrency CFDs are an extremely high-risk, speculative investment. You should be aware of the risks involved and fully consider whether investing in cryptocurrency CFDs is appropriate for you,” the regulator said.
Traders of cryptocurrency CFDs have the protections offered by the UK’s financial services regulatory framework, because the FCA regulates CFDs.
However, these protections will not compensate traders for any losses incurred.
Cryptocurrencies are virtual currencies that are not backed by central banks or government.
The FCA has, in line with regulators in other countries, previously warned about the dangers of investing in digital currencies.
In September it issued a statement regarding the risks associated with initial coin offerings (ICO), a digital way of raising funds from the public using a virtual currency.
The FCA highlighted volatility associated with the platform and also the potential for fraud.
“You should only invest in an ICO project if you are an experienced investor, confident in the quality of the ICO project itself (e.g. business plan, technology, people involved) and prepared to lose your entire stake,” the FCA said at the time.
By Irene Madongo
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