Susannah Streeter, of fund shop Hargreaves Lansdown, said Bitcoin breaching the $40,000 mark last week had spooked investors and prompted some to cash in substantial profits.
“The price is driven by speculation and investors got ahead of themselves. The FCA warning added to concerns over the risks, especially for DIY investors who often do not have diversified portfolios.”
Pimfa, a trade body for the wealth managers, welcomed the FCA’s announcement but said that its warning did not go far enough.
Tim Fasson, of Pimfa, said: “For some people desperate for a quick and easy solution to their own financial turmoil, cryptocurrencies might look attractive. But they are extremely high-risk and highly-volatile investments that only the most sophisticated of investors should consider.”
It called for the FCA to take further action to tighten its control of cryptocurrency promotions as their spread meant consumers were at far greater risk of scams than they have ever been.
However, others argued that Bitcoin was no different to other investments and should not have been singled out for special regulatory attention.
Iqbal Gandham, founder of CryptoUK, a trade association, said the FCA’s statement could be applied to any investment, especially stocks that have risen in value for the past decade.
“The current valuation models for traditional stocks no longer hold. We have seen unprecedented positive market movement for over a decade,” he said. Mr Gandham admitted that volatility was a drawback to owning Bitcoin, but buying and holding was the right way to mitigate this.
Despite the clear risks, big and reputable investors continue to back Bitcoin. JP Morgan, the bank, has gone from calling Bitcoin a “fraud” in 2017 to saying it could rise to $146,000 a coin while Ruffer, the £20bn City fund group, has invested in Bitcoin through its funds.
“It diversifies our investments in gold and inflation-linked bonds and it acts as a hedge to some of the risks that we see in a fragile monetary system and distorted financial markets,” Ruffer said.
Growing acceptance by institutional investors has been touted as one of the main causes of Bitcoin’s ascent in the past 12 months.
Fidelity, the asset manager, found in a 2020 survey of institutional American investors that more than 80pc would be interested in buying digital assets. The most common obstacles, however, was price volatility with half saying it had stopped their foray into crypto.
The next movement for the Bitcoin price goes remains anyone’s guess, and volatility is all but guaranteed. Glassnode, a cryptocurrency research firm, estimated that 78pc of the Bitcoin supply is illiquid.
Of the 18.7 million coins in circulation, just 4.2 million are actively traded on exchanges. This meant prices could move dramatically as investors scramble to trade a small pool of coins.
The latest FCA warning followed its ban on derivatives and exchange-traded products linked to cryptocurrencies which came into effect on January 6.