The FCA today issued a warning to retail consumers on investing in cryptoassets following Bitcoin's dizzying rise and fall again since the new year.
The popular cryptocurrency is down 17% from the $41,500 peak it reached on 8 January, just three days ago. At the time of writing Bitcoin is trading at around $34,000.
The British regulator appears concerned that unregulated firms are targeting consumers with marketing that promises high returns, that there may be some scam activity, and that consumers might not fully understand the risks associated with cryptoassets.
Unfortunately Bitcoin and other cryptoassets are subject to dramatic price falls as well as rises."
The warning follows hot on the heels of the FCA ban on derivatives and ETNs linked to cryptocurrencies, which came into effect on 6 Jan 2021.
Laith Khalaf, financial analyst at AJ Bell: "The idea of getting rich quick is as dangerous as it is attractive and anyone who invests in crypto currencies should be prepared to lose their shirt, or a considerable portion of it."
"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."
"You can see how the rapid price appreciation of Bitcoin, combined with aggressive marketing and low interest rates on cash, creates a perfect storm for consumers looking to get a decent return on their money."
Khalaf added: "Unfortunately Bitcoin and other cryptoassets are subject to dramatic price falls as well as rises. Consumers should be on high alert for unsolicited communications linked to Bitcoin or other crypto currencies and should consider any marketing material with an extremely critical eye. They should also make sure any firm they are dealing with is regulated, or at least has temporary permissions from the regulator.
"Irrespective of what you think the future for cryptocurrencies might be, there's no denying that they are highly volatile and therefore sit at the precarious end of the risk spectrum. Products that are linked to cryptocurrencies might also be complex and hard to understand, further muddying the waters. Consumers probably can't fall back on the Financial Services Compensation Scheme if things go wrong either.
Khalaf cautioned, "The fear is that consumers are leapfrogging stocks and bonds and going straight from cash to Bitcoin, in the mistaken belief it's much the same. Buying Bitcoin and other cryptocurrencies should be something you do with money you are prepared to lose and after you have already built up a sizeable portfolio. If you haven't got a stocks and shares ISA, then you should seriously stop and consider whether you should be investing in Bitcoin."