Cryptocurrency CFD Trading: Consumers Warned Over High 'Investing Risks'
British financial regulator, the Financial Conduct Authority (FCA), has issued a warning to consumers over what it has described as the “extremely high-risk” of buying Contracts for Differences (CFDs), speculative products that include financial spread bets, with cryptocurrencies like Bitcoin as the underlying investment that increasingly are being marketed to consumers.
The notice comes two months after the UK regulator issued a statement and consumer warning about the risks of Initial Coin Offerings (‘ICOs’). In a similar vein to the message earlier this week issued by the European Securities & Market Authority (ESMA), an EU financial regulator based in Paris, the FCA stated this September that ICOs are “very high-risk, speculative investments.”
Cryptocurrency CFDs allow investors to speculate on a change in price of a cryptocurrency such as Bitcoin or Ethereum and use leverage.
The FCA expressed concern over the price volatility and value of cryptocurrencies, and therefore the value of CFDs, complex financial instruments that allow speculation on the price of an asset, linked to them. As such they are “vulnerable to sharp changes in price” due to unexpected events or changes in market sentiment, it stated. A case in point cited was the 30% decline in the price of Bitcoin late last week.
Typically CFDs are offered with leverage, which means an investors only needs to put down a portion of the total value of the investment or contract. However, leverage also multiplies the impact of price changes on both profits and losses. The upshot is that one can lose money very rapidly.
It noted that some firms are offering leverage, which multiplies your losses and potential profits, of up to 50:1. This can have a significant impact on fees and also places investors at risk of losing more than their initial investment.
Furthermore, the FCA noted that charges in the space 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. While such fees many vary significantly between firms, they can impact the likelihood of making a profit or not.
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In terms of price transparency, the regulator stated: “When compared with currencies, there can be more significant variations in the pricing of cryptocurrencies used to determine the value of your CFD position. There is a greater risk you will not receive a fair and accurate price for the underlying cryptocurrency when trading.”
