Regular readers will be aware that I’m not a fan of cryptocurrencies, including Bitcoin.

I think they are inherently worthless, cause huge environmental damage, and are a haven for criminals and terrorists.

Leaving those views to one side for a moment, I want to take a look at a brand new warning issued today by the financial services regulator the Financial Conduct Authority (FCA). The FCA has issued a stark warning to investors about the dangers of investing in crypto assets.

The FCA warning comes as more firms are offering investments linked to crypto assets, including Bitcoin, or indeed lending linked to these digital currencies.

And it also coincides with a fall in the price of Bitcoin, hovering just above $35,000 as I record this, down from a high of $40,000, after doubling in value in about a month.

If you invest in schemes linked to crypto-assets, you should be prepared to lose all of your money. I’m explaining why, in this blog and video.

This warning from the FCA follows a growing number of schemes with the promise of high returns for investors. However, any investment linked to a crypto asset involves taking very high risks with your money. The FCA warns that, if you choose to invest in crypto, you should be prepared to lose all of your money.

As with all high-risk, speculative investments, it’s essential to understand the features of the investment, the risks associated with investing, and any regulatory protections that might apply.

When it comes to investments linked to crypto assets, the FCA warns that you are unlikely to be able to access the Financial Ombudsman Service (FOS) or the Financial Services Compensation Scheme (FSCS) if things go wrong.

Crypto assets including Bitcoin are often linked to scams, due to the absence of regulation. As a result, if you receive a contact out of the blue, or find yourself being pressured into investing quickly, then you should be extremely cautious. Another red flag is being promised high returns from an investment, which are unlikely to materialise.

The FCA has ScamSmart pages on its website which offer more information about protecting yourself from fraud. You can find these at fca.org.uk/scamsmart. But the simple rule here is this; if it seems too good to be true, it usually is. Anything that doubles in value in a month is too good to be true. Investments don’t behave like that.

From a regulatory perspective, where firms are offering investment products linked to crypto assets, they need to comply with the relevant regulatory requirements, including being authorised by the FCA where this is required. From 10th January 2021, all UK crypto-asset firms need to be registered with the FCA as part of a drive to address the money laundering associated with crypto asset buying and selling.

If a firm is operating in this space without FCA registration, they are committing a criminal offence.

Highlighting the risks associated with crypto asset linked investments, the FCA notes that some investments may not be subject to any regulation, beyond anti-money laundering requirements.

They also note price volatility as a concern, with significant price volatility attached to crypto assets. We’ve seen that price volatility in the past few years, and as recently as the past 4 to 6 weeks, with Bitcoin. Keep in mind that Bitcoin remains a tiny asset in terms of market capitalisation; about $350 billion. Compare that to gold, which has a market cap of about $10 trillion. With a small market cap, Bitcoin is understandably incredibly volatile.

There are also inherent difficulties in valuing crypto assets reliably, which places investors at a very high risk of losses. Crypto asset linked investments are incredibly complex, which can make it hard for investors to understand the risks involved.

It’s important to note that there is no guarantee that a crypto asset can ever be converted back into cash, which raises the prospect of a total loss of investments. The ability to convert a crypto asset back to cash depends entirely on the demand and supply within the market.

The FCA warns investors to consider the impact of fees and charges on their investment, as these costs might be higher than those associated with conventional assets.

And finally, the FCA warns that firms promoting these crypto-asset linked investments could be overstating the returns or understating the risks within their marketing materials.

Before investing in a crypto asset linked product, please consider carefully the risks involved and whether this is a suitable investment for you. You should also carry out additional due diligence into the firm behind the product before parting with any money. Part of this due diligence should include checking the Financial Services Register (fca.org.uk/firms/financial-services-register) or the list of firms with Temporary Registration, available by searching on the FCA website at fca.org.uk. I’ll put some links in the description.

Firms appearing on the list of firms with Temporary Registration have not been assessed by the FCA as being fit and proper, or had their application determined for the purposes of the Money Laundering Regulations. If the firm does not appear in either place, investors should ask them whether they are entitled to carry on business without being registered with the FCA. The FCA suggests that, for firms that are operating illegally, investors withdraw their crypto assets and/or money immediately.

One of the events in the world of financial services last year that really wound me up was institutional investors buying into Bitcoin. It’s a factor that appears to have inflated its price in recent months.

I don’t like that fund managers are giving Bitcoin a sense of credibility by adding it to their portfolios. There are also huge question marks about where they are buying their Bitcoin from, and whether by buying it they are indirectly financing terrorism.

I think that’s a huge scandal waiting to come this year, as the regulator here in the UK, and financial services regulators elsewhere, place crypto asset trading under greater scrutiny from an anti-money laundering perspective.

Are you comfortable with the risks associated with Bitcoin?