The City watchdog has warned investors that they should only take part in virtual currency fundraisings if they are prepared to lose all of their money.
In a message to those thinking about buying digital tokens for so-called initial coin offerings – a digital way of raising funds from the public using a virtual “coin” – the Financial Conduct Authority said the process was “very high-risk” and speculative.
“You should only invest in a [coin sale] if you are an experienced investor, confident in the quality of the project itself and prepared to lose your entire stake,” it said.
Its alert comes as cryptocurrencies such as bitcoin and more recent rival ethereum soar in popularity and become increasingly mainstream, with celebrities such as reality TV star Paris Hiltonrecently getting in on the act.
The growth in the sector has triggered a number of warnings around the world, however, with China’s central bank last week announcing a ban on initial coin offerings in a move that resulted in the value of bitcoin tumbling.
JPMorgan chief executive Jamie Dimon also took a swipe at bitcoin at a banking industry conference on Tuesday, saying it “will blow up”.
“If we had a trader who traded bitcoin I’d fire him in a second for two reasons. One, it’s against our rules. Two, it’s stupid.
“It’s worse than tulip bulbs,” he said, referring to famous market bubble from the 1600s. “It won’t end well. Someone is going to get killed.”
Risks flagged by the UK regulator include no investor protection, the potential for fraud and the fact that most coin sales are in the very early stage of development leaving “a good chance of losing your whole stake”.
It also said projects can vary widely in design, with the digital token issued ranging from a “share in a firm, a prepayment voucher for future services or in some cases offer no discernible value at all”.
The warning coincided with a survey conducted by Bank of America Merrill Lynch which showed that bitcoin was now the world’s most crowded trade.
The study, based on interviews with 200 fund managers overseeing more than $600bn (£450bn) in assets, found that 26pc of respondents cited bitcoin as the most crowded trade, beating the 22pc that said Nasdaq.
The value of bitcoin has grown 344pc so far this year, swelling from $1,000 at the start of the year to $5,000 in early September. More than $1.2bn was raised through coin sales in the first half of 2017, according to Autonomous Research.