Online derivatives trading groups are taking advantage of the growth of cryptocurrencies to let retail customers bet on wildly fluctuating prices, prompting warnings from regulators.
IG Group, the biggest UK online derivatives trading company by market share, allows retail investors to trade “contracts-for-difference” based on bitcoin and another digital currency Ether. CFDs track the price of an underlying asset and allow investors to leverage their bets, magnifying gains or losses.
CMC Markets is assessing cryptocurrency products with a view to introducing some “in the next couple of months”, it said. A number of such companies have started to offer CFD trading based on cryptocurrencies over the past three months.
These moves have caught the eye of the UK Financial Conduct Authority. “We are concerned about the growth in retail clients trading in CFDs, particularly those offered with a cryptocurrency as the underlying asset,” it said. “The price volatility of the asset comes with significant risks to retail investors.”
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The watchdog warned last month about initial coin offerings – in which companies issue digital “tokens” in exchange for cryptocurrencies.
Retail investor enthusiasm for digital currencies has grown this year as prices have soared. Bitcoin has gone from less than $250 at the end of 2015 to a peak of more than $5,800. But prices are extremely sensitive: last month it fell by a fifth after Jamie Dimon, JPMorgan chief executive, called it “a fraud”.
Iqbal Gandham, UK managing director of eToro, a website that allows people to copy the strategies of other traders, said: “You’ve got an extremely volatile product on top of an extremely volatile product and you’re adding leverage to that – you’ve got to think, will it blow up?” His site added extra protection for customers within weeks of first offering crypto-CFDs last year.
CySEC the regulator in Cyprus – where many small trading companies are based – has warned that trading the products came with a “high risk of losing all your invested capital”
