The Financial Conduct Authority (FCA) has become the latest regulatory body to issue a warning about cryptocurrency-related products, cautioning investors about the risks associated with cryptocurrency contracts for difference(CFDs).
Cryptocurrency CFDs, according to the FCA, are "increasingly being marketed to consumers" and "are extremely high-risk, speculative products".
They allow investors to speculate on a change in price of a cryptocurrency, such as Bitcoin, using leverage, which means they must put down a portion of the investment's total value.
The FCA warned that some firms are offering investors leverage of up to 50:1.
It said: "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."
It also highlighted cryptocurrencies "have experienced significant price volatility in the past year which, in combination with leverage, places you at risk of suffering significant losses and potentially losing more than you have invested".
"They are vulnerable to sharp changes in price due to unexpected events or changes in market sentiment," it added.
Bitcoin suffered a large sell-off over the weekend of 11 November, having hit a record high of $7,879.06 just a few days before. However, it rallied on Monday morning by more than 11%, rising from its opening price of $5,857.32 to $6,545.20, according to CNBC.
Meanwhile, the FCA added that costs and charges on the cryptocurrency CFDs tend to be "significantly higher than for other CFD products".
It said that 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.
Finally, the FCA said that "when compared with [traditional] 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," it said.
ESMA issues twin warnings over 'high risk' cryptocurrency products
The FCA's warning follows that of the European Securities and Markets Authority (ESMA), which on Monday (14 November) warned investors and firms over the risks associated with initial coin offerings (ICOs), which have seen "rapid growth" in recent years.
ESMA, the pan-European markets regulator, said the "very risky and highly speculative investments" are also often unregulated, and could be used for "fraudulent or illicit activities".
In two statements released on Monday (13 November), ESMA issued warnings to investors and firms over the vagaries and high risks often associated with digital currencies and their related platforms.
ICOs are a tool for raising funds via the issuance of so-called coins or tokens in exchange for either traditional fiat currencies or cryptocurrencies, such as Bitcoin or Ether.
ESMA said it has "observed a rapid growth in ICOs globally and in Europe and is concerned that investors may be unaware of the high risks they are taking when investing in ICOs".
Firms needed to heed compliance with relevant regulations, which might include the Prospectus Directive, MiFID, the Alternative Investment Fund Managers Directive (AIFMD) and the Fourth Anti-Money Laundering Directive, it said.
The watchdog warned investors of risks around fraud, total capital loss, illiquidity and price volatility. A lack of accurate and complete information and flawed technology were also raised as concerns.
According to the regulator, the vast majority of ICOs are launched by businesses that are at a very early stage of development, and therefore have an "inherently high risk of failure".
In addition, ESMA identified the volatility of the pricing of the coins or tokens being issued, adding that they have "no intrinsic value other than the possibility to use them to access or use a service/product that is to be developed by the issuer".
On liquidity, the regulator said investors faced a "lack of exit options", as coins or tokens may not be able to be traded on or exchanged for traditional currencies.
Meanwhile, supporting information is often "inadequate", ESMA warned, with documents described as "unaudited, incomplete, unbalanced or even misleading".
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