The UK Financial Conduct Authority (FCA) has recently issued a consumer warning about contracts for differences (CFDs), including financial spread bets, with cryptocurrencies as the underlying investment.

CFDs are complex financial instruments which allow speculation on the price of an asset. CFDs are typically offered with leverage which means a consumer only need to put down a portion of the investment’s total value. However leverage also multiplies the impact of price changes on both profits and losses. Cryptocurrency CFDs allow investors to speculate on a change in price of a cryptocurrency such as Bitcoin or Ethereum. They have experienced significant price volatility in the past year which, in combination with leverage, places consumers at risk of suffering significant losses.

The FCA warns that cryptocurrency CFDs are an extremely high-risk, speculative investment:

  • Price volatility: The value of cryptocurrencies, and therefore the value of CFDs linked to them, is extremely volatile. For example, the value of some cryptocurrencies recently fell by more than 30% in a single day.
  • Leverage: Some firms are offering leverage of up to 50:1. Leverage multiplies an investor’s losses and potential profits, and can have a significant impact on fees.
  • 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.
  • Price transparency: When compared with traditional fiat currencies, there can be more significant variations in the pricing of cryptocurrencies used to determine the value of the investor’s CFD position.

The FCA regulates CFDs which means that when a UK consumer trades cryptocurrency CFDs he or she has the protections offered by the UK’s financial services regulatory framework. However, these protections will not compensate an investor for any losses from trading.