Recently, digital currency contracts for differences, also known as CFDs, have become more and more popular thanks to an increased marketing effort on the part of providers. Because of this, the UK Financial Conduct Authority (FCA) has decided to issue a warning pertaining to the possible risks that investors expose themselves to when trading CFDs.
Understanding the CFD risks
Digital currency CFDs are complex financial instruments allowing investors to speculate on the possible changes in coin prices. Most of the time, CFDs are offered with leverage, which means that investors are only required to invest a portion of the total value of assets being traded. However, the existence of large leverage considerably increases the impact that a price change could have on both profits and losses. In other words, if traders don’t speculate well, they can quickly lose their money due to volatility.
According to the FCA, trading CFDs poses several risks, such as volatility, leverage, charges, funding costs and price transparency. Therefore, in the opinion of the FCA, digital currency CFDs are both high-risk and extremely speculative financial instruments.
CFD traders in the UK are protected by the FCA, as the financial regulator oversees the activity of firms offering these trading instruments. However, the FCA has once again pointed out that it cannot offer any compensation to individuals who lose money from trading these instruments.
Based on these points, do you consider CFDs to be high-risk investments? Let us know your thoughts in the comment section below.