Finance experts have urged retail investors to take care when buying into bitcoin after the UK regulator this week warned savers of the risks of putting money into volatile cryptocurrencies.

The Financial Conduct Authority cautioned that the market for cryptoassets offered little protection for consumers and firms offering them often overstated the rewards and downplayed the risks.

The value of bitcoin has more than tripled since October, and valuations surged past $40,000 before falling in a weekend sell-off as investors dumped holdings. On Monday alone, cryptocurrencies lost more than $150bn in value, according to data from Coin Metrics. By Thursday, bitcoin had recovered much of the lost ground, trading at over $39,000.

Laith Khalaf, a financial analyst at investment broker AJ Bell, said: “Anyone who invests in cryptocurrencies should be prepared to lose their shirt, or a considerable portion of it . . . The fear is that consumers are leapfrogging stocks and bonds and going straight from cash to bitcoin, in the mistaken belief it’s much the same.”

Susannah Streeter, an analyst at investment platform Hargreaves Lansdown, said: “Bitcoin’s price is being driven primarily by future price speculation. The FCA clearly believes the crypto Wild West could be running out of control, and is warning that consumers risk losing all their money if they succumb to promises of fast and high returns.”

Bitcoin is nonetheless increasingly seen as a tool for diversifying portfolios and a hedge against currency devaluation and frothy equity markets.

“Fears around devaluation of the dollar and the chance of inflation eating away at the dollar mean you’re seeing people come in and put up to 5 per cent of [their] portfolio into this asset class,” said Matt Blom, global head of sales trading at cryptocurrency trading platform Diginex. “There are a lot of investors placing money in this space who weren’t here in 2017.”

Five bitcoin-centric exchange traded funds (ETFs) have launched since the start of 2019, pointing to a marked increase in appetite among retail investors. In December more than $121m flowed into bitcoin and cryptocurrency ETFs, and global assets under management in these funds more than doubled from October, to more than $3bn, according to TrackInsight, an ETF data provider.

But larger-scale investments have also become more commonplace, suggesting greater institutional involvement. Purchases of bitcoin by “wallets” holding more than 1,000 coins, or stakes worth approximately $35m at recent prices, have spiked as the price of bitcoin tumbled from last week’s highs.

In 2017, fewer than 1,600 people or institutions held more than 1,000 bitcoin. This week, more than 2,400 held stakes of equivalent or greater size, according to data from the cryptocurrency data tracker Glassnode.

The Ruffer Investment company in the UK attracted attention in November when it took out a substantial holding in bitcoin, and is currently trading at an almost 1 per cent discount, after netting between £327m and £693m in profit from the trade, with a total return of 16.8 per cent for the past 12 months, according to the Association of Investment Companies, an industry body.

Cryptoasset investments are available on many big investment platforms in the UK, though whether it should be offered to non-professional investors has long divided opinion. Some say the risks to retail investors remain profound.

“It’s important to note that [Ruffer] only invested around 2.5 per cent [in bitcoin] of a portfolio that is otherwise invested in more traditional assets,” said Mr Khalaf.

Writing about the recent sell-off in a note, Simon Peters, cryptoasset analyst at investment broker eToro, said: “The most bullish large-scale investors have been using the recent price dip as an opportunity to add to their balance sheets at a (relatively) cheap price and retail investor sentiment continues to remain positive.”

The largest holders of bitcoin remain those investment houses which are focused on cryptocurrency and digital assets, rather than traditional asset managers. But other companies are buying too. Square, a mobile payments company founded by Twitter chief executive Jack Dorsey, holds a stake worth $155m, according to data provider Bitcoin Treasuries.

Dan Lane, a senior analyst at Freetrade, said: “The longer crypto stays part of the conversation, and the more bigger firms explore blockchain and its potential usage, the more investors feel validated in gaining exposure to the asset.”

However, Mr Khalaf said retail investors remained at risk. Cryptocurrency investments are not covered by the Financial Services Compensation Scheme if something goes wrong. An FCA ban on the sale of cryptocurrency derivatives to retail investors came into effect in January.

In a post that appeared on eToro’s bitcoin page, Butler, an “elite” investor on the platform, likened patterns of investor enthusiasm now to those he saw in the run-up to the 2017 price collapse, when his mother had said she was thinking about investing in bitcoin.

“I would not be overly surprised if bitcoin broke through $50,000 and beyond, but I have also seen it lose more than 80 per cent of its value,” Butler said. “You have to ask yourself, are you in a financial position to lose 80 per cent of your holdings in cryptocurrencies right now?”