20 Nov 2017

FCA issues warning to investors in cryptocurrency

FCA issues warning to investors in cryptocurrency

Bitcoin is regularly in the news - normally due to huge falls or massive gains in the value of this high-profile cryptocurrency.

Investors have had a roller-coaster ride in the last few years. Some who got in early and kept their holding have made a fortune, while others have not been so lucky.

It's hard to believe that a single Bitcoin could be bought for only a few US cents in 2010, but by last Friday it had an eye-watering price tag of nearly $8,000.

Britain's Financial Conduct Authority has now issued a warning to consumers about the risks of investing in cryptocurrency contracts for differences (CFDs), which it described as an "extremely high risk, speculative investment".

The FCA said that CFDs are complex financial instruments, and through cryptocurrency CFDs investors can speculate on a change in price of a cryptocurrency such as Bitcoin or Ethereum.

Concerns

The authority has highlighted its concerns about cryptocurrencies CFDs, which include:

  • Price volatility: The value of cryptocurrencies, and therefore the value of CFDs linked to them, is extremely volatile. 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.
  • Leverage (where you only need to put down a portion of an investment's total value): Some firms are offering leverage of up to 50:1. Leverage multiplies your losses and potential profits, and can have a significant impact on fees. It also places you at risk of losing more than your initial investment, meaning you could end up owing money to the firm.
  • Charges and funding costs: 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), funding charges, and commissions. You should consider the impact of these fees, which may vary significantly between firms, on your likelihood of making a profit.
  • Price transparency: When compared with currencies, there can be more significant variations in the pricing of cryptocurrencies used to determine the value of your CFD position. There is a greater risk you will not receive a fair and accurate price for the underlying cryptocurrency when trading.

The FCA regulates CFDs, which means that when you trade cryptocurrency CFDs you have the protections offered by the UK’s financial services regulatory framework.

But the authority warned: "These protections will not compensate you for any losses from trading."

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