Bitcoin’s value has surged in recent weeks, almost tripling from $11,381 in mid-October to $32,930 on Monday, encouraging many speculators to jump in, hoping for big returns.
However, the price has fluctuated wildly, dropping 16 per cent between Sunday and Monday.
A number of institutional investors have also got in on the act as yields on some traditional, safer investments remain low.
The Financial Conduct Authority (FCA) told ordinary savers to be extremely wary of putting their cash into the cryptocurrency boom.
“The FCA is aware that some firms are offering investments in cryptoassets, or lending or investments linked to cryptoassets, that promise high returns,” the regulator said in a statement on Monday.
“Investing in cryptoassets, or investments and lending linked to them, generally involves taking very high risks with investors’ money.”
It added: “If consumers invest in these types of product, they should be prepared to lose all their money.”
The regulator warned that some investments advertising high returns based on cryptoassets may not be subject to regulation beyond basic anti-money laundering requirements.
It said significant price volatility, combined with the “inherent difficulties of valuing cryptoassets reliably” places consumers at high risk of losses.
Companies pushing cryptocurrency-based investment products may also overstate the potential returns and it may not always be possible to convert cryptoassets back into ordinary currency, the FCA warned.
Several sites offering investments in cryptocurrency have disappeared with people’s money since bitcoin was invented in 2009.
Some analysts have touted crytpocurrencies as a hedge against inflation or even as a safe haven during turbulent economic times, akin to “digital gold”.
But the value of the digital coin has frequently fallen as rapidly as it has risen, meaning large gains by some have come alongside significant losses for others.
The total value of all bitcoin in circulation was $619bn on Monday, according to CoinMarketCap.com.