The UK’s Financial Conduct Authority has warned of investment risks in cryptocurrency contracts-for-differences, a type of financial derivative.
The Financial Conduct Authority (FCA), the UK’s primary financial regulator and watchdog, has issued a consumer warning about the risks of investing in cryptocurrency contracts-for-differences (CFDs). A CFD contract, in this scenario, would essentially see two parties exchange the difference between the opening and closing prices of a cryptocurrency over a specific period of time. The speculative contract could lead to a negative difference that would cost the buyer and is therefore deemed as “extremely high-risk, speculative” by the regulator and watchdog.
“CFDs are typically offered with leverage which means you only need to put down a portion of the investment’s total value,” the FCA explained. “However, leverage also multiplies the impact of price changes on both profits and losses. This means you can lose money very rapidly.”
Highlighting Bitcoin and Ethereum as two examples of cryptocurrencies speculated over in a CFD, the FCA added:
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 agency listed price volatility, leverage, price transparency & charges and funding costs as its four fundamental concerns behind its consumer warning. “Some firms are offering leverage of up to 50:1” the FCA added, telling consumers they could end up losing their investment entirely and end up owing money to the firm. Fees for cryptocurrency CFDs “tend to be significantly higher” than other CFD products, the authority added.
Further, the agency confirmed all CFDs fall under its regulatory supervision, including cryptocurrency CFDs. However, the protections will not insure consumers against trading losses.
Earlier in September, the FCA joined the growing list of regulatory counterparts around the world in issuing a consumer warning against initial coin offerings, or ICOs, calling them “very high-risk, speculative investments”.