In mid-2020, UK’s financial regulator the FCA, issued a ruling disallowing the sale and promotion of trading options on cryptocurrencies to retail investors. While many of UK’s retail investors cannot afford to invest on bitcoins today, due to its current high price value, many turned to Contracts for Differences (CFDs) as an alternative trading option. After all, CFDs do not involve buying of a cryptocurrency as an investment asset, but only entails taking a financial position on how the price of a particular crypto asset will trend and behave crypto trading sites.
FCA’s Explanation for the Ruling
The Financial Conduct Authority or FCA explained that the reason behind the ruling is that cryptocurrencies like bitcoin, ethereum, litecoin, ripple and the likes, are unregulated assets and are not specified investments by virtue of legislation. That being the case, there are no policies, rules and guidelines that apply to their sale and purchase when traded as an investment asset.
Although trading on financial derivatives is an option available to UK’s institutional investors, the contracts executed and held as investment instruments, are for specified investments like stocks, foreign currencies and other valuable commodities like oil, and precious metals or gems.
However, it came to the attention of the FCA that majority of those who tend to suffer sudden and unexpected losses are the retail investors, and mostly the amateurs. Mainly because, unlike institutional investors, many of those who are new to the investing field do not understand that cryptocurrencies are high risks because of their volatile nature.
Who are the Institutional Investors?
An institutional investor can be an individual or organization that participate in trading activities by directly buying and/or selling securities in blocks or large quantities. Doing so earn them the right to receive preferential treatment as well as give them the ability to negotiate for lower fees. This denotes that if you’re into piece-meal investing through the services of a broker, you account as one of the retail investors in the financial markets.
Institutional investors are those whose business is to provide investing services on behalf of different people, usually as investment managers of pension funds, hedge funds, mutual funds or endowment funds. Other known institutional investors are investment and trust banks, commercial insurance companies and private equity investors.
Generally, people entrust their money to institutional investors who are highly reputable; particularly those whose expertise and knowledge of the financial markets make it possible for their money to grow. If the results are otherwise, contracts can end while those with surplus money will simply choose another investment manager or bank.
Inasmuch as institutional investors move large blocks of holdings over securities, bonds and other investment assets, how they move such investment products tend to influence the markets. Take note that when institutional investors began embracing the concept of using bitcoins as hedge funds, BTC prices started soaring to record-breaking levels.
Still, not all institutional investors are alike, which is why retail investors who possess the expertise and experience prefer to take control and management of their own investing activities, usually with the help of a broker. An investment broker is different from an institutional investor because as broker, he trades securities on behalf of a retail investor based on the buying and/or selling decisions of the latter.
While savvy retail investors also dabble into options trading by way of financial derivatives, they engage the services of brokers licensed by the UK’s FCA. Based on the recent report entitled “3rd Global Cryptoasset Benchmarking Study” released by the University of Cambridge, most crypto investments firms operating in the UK do so without the required FCA licence.
One such firm reviewed by the AstTrader team of analysts is Tradeo. Still, if you’re not a UK resident and want to learn more about this CFD broker since the firm is also popular as a provider of a social trading platform, a comprehensive Tradeo.