Financial watchdogs are warning investors and speculators to stay away from cryptocurrency CFDs over concerns about how easily money can be lost in trading.
CFDs – contracts for differences – are complicated financial products typically offered by online trading platforms.
Cryptocurrency CFDs invite investors to speculate on the change in value of Bitcoin, Ethereum and other virtual currencies.
Bets can be on ‘spreads’ between values or simply rises and falls.
“Cryptocurrency CFDs are an extremely high-risk, speculative investment,” says the watchdog, the Financial Compliance Authority. “You should be aware of the risks involved and fully consider whether investing in cryptocurrency CFDs is appropriate for you.”
Cryptocurrency CFD risks
The FCA warning notice lists several risks related to gambling on cryptocurrency CFDs:
- Exchange rate volatility – Although cryptocurrencies are not traded against ordinary currencies, they have an exchange rate for ease of tracking value. The rate is liable to major gains and losses in a short time – recently Bitcoin lost around 30% of value in a day.
- Leverage – Leverage multiplies profits and losses, along with the related fees. Investors can lose more than their initial investment with some platforms offering leverage of 50:1.
- Fees and costs – Cryptocurrency CFD costs tends to be higher than those for similar products. The FCA says they vary between firms and impact profits.
- Pricing transparency – Platforms can apply unfair and inaccurate values on CFD positions, says the FCA.
CFDs are for sophisticated investors
“Be wary if you’re contacted out of the blue about cryptocurrency CFDs, pressured to invest quickly or promised returns that sound too good to be true,” said an FCA spokesman.
“Check the FCA Register of financial services firms. If a firm does not appear on the register then it is best not to trade with that firm, transfer funds, or provide any banking details.
“We strongly advise you to take independent professional advice before making any investment.”
Although companies offering CFDs are registered or authorised by the FCA and come under the protection of the Financial Ombudsman, trading losses are not safeguarded.
“You should only invest if you are an experienced investor with sophisticated knowledge of financial markets and you fully understand the risks associated with CFDs and cryptocurrencies,” added the spokesman.