The regulator said investors looking to invest in the digital asset market should be prepared to take on “high-risk, speculative investments” which may also leave them outside of the UK’s various consumer protection schemes
The price of Bitcoin has come off the boil at the start of the week, suffering a sharp drop in value after the UK’s financial regulator said investors wishing to park their cash in crypto assets “should be prepared to lose all their money” and that the assets or products linked to them were “high-risk, speculative investments”.
In an announcement on Monday, the Financial Conduct Authority (FCA) warned that investing in crypto assets meant consumers were “unlikely to have access” to the various protection bodies such as the Financial Ombudsman Service (FOS) or the Financial Services Compensation Scheme (FSCS), which protects customer’s monetary deposits if a financial services firm fails.
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The FCA also cautioned that “significant price volatility” and the complexity of crypto products also placed consumers at a high risk of loss, and that they may also find fees for such investments will be higher than regulated products.
The warning from the regulator follows Bitcoin’s sudden return to the spotlight last year as the value of the digital currency skyrocketed as investors sought to hedge their bets against the volatility of the equity markets during the pandemic.
“There is no denying that cryptocurrency is gaining more mainstream attention thanks to the stratospheric rise of Bitcoin, the first and best-known cryptocurrency, in recent history”, said Interactive Investor’s Myron Jobson, who added that cryptocurrency mining group () was the stockbroker’s most bought investment in the first week of 2021.
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However, Jobson warned that investors with fear of missing out (FOMO) on Bitcoin’s rise “won’t look before they leap and, encouraged by glossy marketing hooked on the meteoric rise of Bitcoin, invest in crypto assets which is a highly complex, high risk and relatively new area of investments”.
He added that more seasoned crypto investors may remember the 2017 bull run for Bitcoin, which saw the price soar towards the end of the year to then crash in early 2018.
“While it’s always tempting to follow the ‘this time it will be different’, the fact remains that the asset is notoriously volatile - and for many investors, the price swings have been simply too wild to stomach. But whatever your approach to risk, cryptocurrency should only be a tiny proportion of a portfolio”, Jobson concluded.
In something of an underscoring of the FCA’s warnings about Bitcoin’s volatility, its value was down nearly 16% over a 24 hour period at US$32,866 in late-afternoon trading on Monday.