Investors warned over cryptocurrency price speculation tools
Contracts for Differences (CFDs) are a trading tool. Often offered through online platforms, they allow investors to speculate on the price movement of an asset.
The Financial Conduct Authority (FCA) has today warned about the risks of investing in complex cryptocurrency CFDs, such as Bitcoin or Ethereum.
It said that CFDs are typically offered with leverage which means you only need to put down a portion of the investment’s total value.
But the leverage multiplies the impact of price changes on both profits and losses. Investors can lose money very quickly, significantly more than the amount originally invested in some cases.
Cryptocurrencies are virtual currencies not issued or backed by a central bank or government but the FCA regulates CFDs affording investors some protections. However, there is no compensation for trading losses.
The regulator highlighted four areas of concern:
- Price volatility: the value of cryptocurrencies, and therefore the value of CFDs linked to them, is extremely volatile. They’re vulnerable to sharp changes in price due to unexpected events or changes in market sentiment. The value of some cryptocurrencies has fallen by more than 30% in a single day.
- Leverage: 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.
In particular, if you are contacted out of the blue, pressured to invest quickly or promised returns that sound too good to be true, it could be a scam.
Check the FCA Register of financial services firms – if the firm doesn’t appear, you shouldn’t trade with that firm, transfer funds, or provide any banking details.