The Financial Conduct Authority has raised concerns about virtual currencies such as Bitcoin, saying investors should be prepared to lose all their money.
Initial coin offering issuers accept a cryptocurrency, like Bitcoin or Ether, in exchange for another one related to a specific firm or project.
The FCA said the digital token may represent a share in a firm, a prepayment voucher for future services or it may have no discernible value at all.
In its warning the FCA said ICOs are “very high-risk, speculative investments”.
It said: “You should be conscious of the risks involved … and fully research the specific project if you are thinking about buying digital tokens.
“You should only invest in an ICO project if you are an experienced investor, confident in the quality of the ICO project itself (e.g. business plan, technology, people involved) and prepared to lose your entire stake.”
The FCA added that there is likely to be no investor protection, most ICOs are not regulated and there is the potential for fraud.
This move by the FCA follows a decision by the People’s Bank of China earlier this month which made the use of ICOs illegal.
The most famous example of a cryptocurrency is Bitcoin, which was launched in 2009 and is accepted by around 100,000 shops and vendors.
Recent research showed there were between 2.9 and 5.8m people around the globe using cryptocurrency.
One bitcoin is currently worth £3,256.24 but its price has proved wildly volatile.
It has soared from £0.04 per coin in 2010 to its recent peak, with occasional fluctuations of hundreds of pounds over the course of several weeks.
Sebastian van Mook, a financial adviser with Abacus Associates, said: "It would be a very fair assumption that if you invested in cryptocurrency you should be prepared to lose all your money.
"It is not something I have ever got involved in and I would never advise anyone to get involved in it."