Punters will be banned from making high-risk bets on the price of bitcoin and other so-called cryptocurrencies from January under new rules introduced by the City watchdog.

Ordinary investors will no longer be able to bet on derivatives that track the price of digital money after a crackdown by the Financial Conduct Authority (FCA), due to fears inexperienced traders were being saddled with huge losses.

Gamblers have poured money into cryptocurrencies in the hope of making a quick return, but many were left nursing huge losses when prices later fell in a market prone to wild swings.

The ban on the sale, marketing and distribution of derivatives includes contracts for difference, options, futures and= exchange traded notes.

Bitcoin, the preeminent cryptocurrency, hit a peak in December 2017 of £14,749 but has lost 44pc of its value since and is now worth £8,262. Spread betting companies offered investors the chance to put money into assets such as Bitcoin, Ether and Ripple through derivatives.

The FCA has said these were “ill-suited” to private investors as the underlying assets cannot be reliably valued. It added that many of those investing in these derivatives had an “inadequate understanding” of the asset class.

Sheldon Mills of the FCA said: “Significant price volatility, combined with the inherent difficulties of valuing crypto assets reliably, places retail consumers at a high risk of suffering losses. We have evidence of this happening on a significant scale.” 

The review found that there was also a prevalence of market abuse and financial crime among those that trade cryptocurrency, which posed an unnecessary risk to investors.

Mr Mills said: ‘This ban reflects how seriously we view the potential harm to retail consumers in these products. Consumer protection is paramount here.” 

The ban will be enforced from January 6 2021. Any firm offering derivatives that reference cryptocurrencies after this are likely to be a scam.

Investors that wish to own these assets can still buy cryptocurrencies directly. Edward Drake of trading site eToro said 84pc of cryptocurrency investors on the site invested in the underlying asset, rather than through a derivative.