Consumers should be prepared to “lose all their money” if they invest in products that promise high returns from cryptoassets such as bitcoin, the City watchdog has warned.
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 advice comes just days after bitcoin surged past $40,000 (£29,600), having doubled its value in less than a month. The price has since fallen to about $35,000.
“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 are out of pocket will not be able to rely on the Financial Ombudsman Service to settle complaints or order compensation from offending firms. Consumers are 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. There is no guarantee that cryptoassets can 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.
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.
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.
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