Cryptocurrencies are digital tokens which may represent a share in a firm, a prepayment voucher for future services or it may have no discernible value at all.
They are often sold through initial coin offerings, where issuers accept a cryptocurrency, such as Bitcoin or Ether, in exchange for another one related to a specific firm or project.
The FCA said retail investors have also been buying contracts for difference (CFDs) which allow investors to take a view on the direction of the price of an asset in a way similar to a spread bet.
So if an investor puts £1,000 into a CFD position on Bitcoin, they receive a pre-defined cash return for every point by which Bitcoin rises in value, and lose a pre-determined amount for every point the asset falls in price.
According to Coindesk one Bitcoin is currently worth £4,295 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.
The FCA said: “We are concerned about the growth in retail clients trading in CFDs, particularly those offered with a cryptocurrency as the underlying asset.
"The price volatility of the asset comes with significant risks to retail investors. The FCA’s strong focus on the UK CFD sector will continue and we will take action where firms fail to meet our expectations, as we have done already."
The FCA’s concerns come after remarks from JP Morgan boss Jamie Dimon, and BlackRock founder Larry Fink, both of whom dismissed Bitcoin as having no intrinsic value and being primarily of use to criminals.
Mr Dimon said governments around the world would crush the currency as they view it as a threat to the established financial system.
He said a value cannot reasonably be put on Bitcoin as it has no intrinsic value.
Last month the FCA raised concerns about virtual currencies such as Bitcoin, saying investors should be prepared to lose all their money.
This move by the FCA follows a decision by the People’s Bank of China earlier this month which made the use of initial coin offerings illegal.
Lee Wild, head of equity strategy at Interactive Investor, said: “The value of Bitcoin has almost doubled in less than a month which is clearly attracting further interest from speculators.
"There’s evidence of growing institutional activity, too, and if China reopens cryptocurrency exchanges after the Communist Party Congress which starts next week, some believe the price could reach $10,000 by the end of the year.
“However, there could be near-term turbulence around changes to the code the Bitcoin network runs on, due to be implemented in mid-November.
"It is crucial that retail investors understand the many risks involved in cryptocurrency trading, not least the volatility - Bitcoin has lost more than a third of its value on two occasions since June. It is clearly not for the faint-hearted."
david.thorpe@ft.com
