The European Securities and Markets Authority said investors should be wary of participating in initial coin offerings (ICO’s) of cryptocurrency, including Bitcoin, as their price fluctuates wildly.
In a statement issued on Monday, The regulator said: “ESMA is alerting investors of the high risk of losing all of their invested capital as ICOs are very risky and highly speculative investments. The price of the coin or token is typically extremely volatile and investors may not be able to redeem them for a prolonged period.”
In an ICO a business or individual issues coins and puts them up for sale in exchange for hard currencies, such as the pound or US dollar, or more often virtual currencies including more Bitcoins, or rival Etherium.
ESMA said as ICOs currently fall outside the scope of EU laws and regulations investors are particularly exposed while ICOs are vulnerable to the risk of fraud or money laundering.
The pronouncement follows a rollercoaster weekend for the price of Bitcoin, which tumbled from $7,325.36 (£5,597.31) on Friday to a low of $5,617.69 (£4,292.48) on Sunday as the creation of a new form of bitcoin – Bitcoin Gold – caused volatility.
The price had recovered somewhat to trade around $6,600 (£5,043) on Tuesday morning (GMT), buoyed in part by confirmation that CME – the world’s biggest derivatives exchange – would be issuing futures contracts on Bitcoin next month.
Speaking on CNBC’s ‘Power Lunch’ show in the US on Monday, Terry Duffy, chairman and CEO of CME said: “I think sometime in the second week in December you’ll see our [bitcoin futures] contract out for listing.”
The contracts will allow investors to make bets on the price of Bitcoin – typically that it will fall – otherwise called shorting.
Some analysts believe this could lead to further volatility for the nascent currency. Others, however, argue that as long as traders know what they are doing, Bitcoin should continue to deliver.
Nicholas Gregory, founder and CEO of London-based cryptocurrency enabler CommerceBlock, said: “Plenty of people hold billions of pounds worth of cryptocurrency right now at no risk. That’s because they are using hedging or short positions to cover losses that might occur before they are able to convert their money into pounds and pence. This is common practice for businesses using traditional currencies.
“The people making all the noise as the price makes sudden swings are the only ones who stand to lose. They are the currency speculators and, just as in the traditional foreign exchange markets, there will be as many winners as losers among them.”