Consumers should be prepared to lose all their money if they invest in schemes promising high returns from digital currencies such as bitcoin, a City watchdog has warned.
The volatile nature of cryptoassets was highlighted again on Monday as bitcoin dropped 28% from Friday’s record high of $42,000, having doubled its value in less than a month. Despite the day’s decline to $30,200, bitcoin is still only at its lowest level since the first day of the new year.
As the popularity of cryptocurrencies grows, the Financial Conduct Authority urged consumers to understand what they were investing in and the financial risks involved, given they were unlikely to be protected by UK schemes that help investors reclaim cash when companies go bust.
The FCA said some crypto investment firms may be overstating potential payouts, or understating the risks.
“The FCA is aware that some firms are offering investments in cryptoassets, or lending or investments linked to cryptoassets, that promise high returns,” the regulator said on Monday.
“Investing in cryptoassets, or investments and lending linked to them, generally involves taking very high risks with investors’ money. If consumers invest in these types of product, they should be prepared to lose all their money,.”
Investors who found themselves out of pocket would not be able to rely on the Financial Ombudsman Service to settle complaints or order compensation from offending firms. Consumers were also unlikely to be covered under the Financial Services Compensation Scheme, which covers losses up to £85,000 on fully regulated accounts and investment products including pensions.
The FCA said the complexity of some services and products linked to cryptoassets made it hard for consumers to understand the full risks. Therewas no guarantee that cryptoassets could be converted back into cash, putting consumers at the mercy of supply and demand in the market.
They should also be aware that some firms that promise high returns may not face any regulation beyond basic money-laundering requirements.
The FCA added that the “significant price volatility in cryptoassets, combined with the inherent difficulties of valuing cryptoassets reliably” put consumers at a high risk of losses.
Laith Khalaf, a financial analyst at broker AJ Bell, said: “The regulator is clearly concerned that the high risks already inherent in cryptoassets are being compounded by scam activity, as well as unregulated firms targeting consumers with marketing material that highlights the rewards, but not the potential downside, of investing in cryptoassets.”
Bitcoin has become increasingly popular with mainstream institutional investors, including those who view it as a way to hedge against inflation. Some analysts have said media coverage of the cryptocurrency has also drawn in speculative buyers.
However, some sceptics have warned that the cryptoboom could be heading for trouble, and that the currencies themselves have no intrinsic value.
Myron Jobson, of online investment platform Interactive Investor, said bitcoin’s price surge has made Argo Blockchain – a publicly-traded blockchain technology company focused on large-scale cryptocurrency mining – the most-bought investments on its site since the new year.
“The worry is that FOMO (fear of missing out) investors, won’t look before they leap and, encouraged by glossy marketing hooked on the meteoric rise of bitcoin, invest in cryptoassets which is a highly complex, high risk and relatively new area of investments,” Jobson explained.
“The performance of bitcoin is hard to ignore, but we have seen all this before in 2017, and it’s come crashing down to earth. While it’s always tempting to follow the ‘this time it will be different’, the fact remains that the asset is notoriously volatile,” he added.
Regardless of investors’ risk appetite, Jobson said cryptoassets should only be a “tiny proportion of a portfolio.”
The FCA said investors should take precautions, by checking whether firms were on the Financial Services Register.
If firms were not listed, consumers should ask whether companies were allowed to serve customers without gaining FCA permission, and consider withdrawing their cash.