Losing money with cryptocurrency CFDs
It was good to see the Financial Conduct Authority issue a strong warning about the dangers of using contracts for differences with cryptocurrencies as the underlying investments.
These high risk structures, which are better described as gambling than investing, are being promoted to consumers on a growing basis.
As the FCA points out, they are extremely high-risk, speculative products. The FCA warning is designed to inform consumers about the risks of buying them.
CFDs are based on complex financial instruments allowing the buyer to speculate on the future price of an asset.
They are typically leveraged, so the investor puts down a small portion of the total value. The leverage multiplies the impact of positive and negative price changes, which means investors can make or lose money very quickly.
Where applied to the cryptocurrency market, these CFDs are typically speculating on the price of Bitcoin or Ethereum.
These virtual currencies have no government or central bank backing. In recent years, they have experienced significant price rises, combined with lots of volatility.
When combined with CFDs, cryptocurrencies can result in significant financial losses and losing a lot more than you have originally invested.
The FCA has highlighted several concerns about the products.
These concerns include price volatility, with the value of cryptocurrencies, and therefore the value of linked CFDs, both extremely volatile.
The city regulator points out that the underlying assets are vulnerable to sharp changes in price due to unexpected events or changes in market sentiment.
Another concern is the way in which leverage is used with these products.
Some firms are offering leverage as high as 50:1, which quickly multiplies losses as well as gains. If you lose more than your initial investment, you end up owing money to the firm.
Other concerns highlighted by the FCA including the charges which are often significantly higher than for other CFD products, and a lack of price transparency.
They warn that you should only invest if you are an experienced investor with a sophisticated knowledge of financial markets and you fully understand the risks involved.
Whilst the FCA regulates CFDs and investors would have access to the Financial Services Compensation Scheme, these protections would not compensate you for any losses from trading.
Where cryptocurrency CFDs are being offered by firms which are established and authorised in the European Economic Area (EEA), you would need to refer complaints to the relevant authority in that jurisdiction.
In our opinion, cryptocurrency CFDs are a great way to lose a lot of money very quickly.
It’s good to see the FCA being proactive with this consumer warning which will hopefully deter investors from getting mixed up in the unnecessary risks, charges and complexities associated with such a speculative investment.