The Financial Conduct Authority (FCA) said cryptocurrency CFDs are "an extremely high-risk, speculative investment" and that only experienced investors "with sophisticated knowledge of financial markets" who "fully understand the risks associated with CFDs and cryptocurrencies" should consider investing in them.
It said it was issuing its warning after it had noticed an increase in cryptocurrency CFDs being "marketed to consumers".
The regulator described CFDs as "complex financial instruments which allow you to speculate on the price of an asset". It said it had noticed an increase in CFDs linked to cryptocurrency valuations being "marketed to consumers". It highlighted concerns about such products, including in relation to their price volatility.
"The value of cryptocurrencies, and therefore the value of CFDs linked to them, is extremely volatile," the FCA said in its warning. "They are vulnerable to sharp changes in price due to unexpected events or changes in market sentiment. The value of some cryptocurrencies recently fell by more than 30% in a single day."
The leverage offered on some cryptocurrency CFDs being marketed is also a concern, it said.
"Some firms are offering leverage of up to 50:1," the FCA said. "Leverage multiplies your losses and potential profits, and can have a significant impact on fees. It also places you at risk of losing more than your initial investment, meaning you could end up owing money to the firm."
Investors in cryptocurrency CFDs also face charges that "tend to be significantly higher than for other CFD products", the regulator said. It said investors should consider how the fees applied might impact on the "likelihood of making a profit".
The FCA also said it was concerned that investors may not be given the full picture on the price of cryptocurrencies that determine the value of the CFDs.
"There is a greater risk you will not receive a fair and accurate price for the underlying cryptocurrency when trading," it said.