The Financial Conduct Authority (FCA) said there was no reliable basis for valuing cryptoassets that underpin derivatives and exchange-traded notes.
The ban, which prompted surprise and anger in the sector, will come into force on Jan. 6, 2021.
Shares in Plus500, IG and CMC fell by between 1% and 3.6% after the FCA published its statement on the ban.
"Many will think it is not necessary - there are already material leverage restrictions related to this form of trading and this appears quite 'nanny state'," lawyers at Ashurst said.
The watchdog had set out proposals for a ban in a public consultation last year, and said on Tuesday the move would save retail investors 53 million pounds.
There is a prevalence of market abuse and financial crime, along with extreme volatility in prices, and lack of legitimate need to invest in such products, the FCA said.
"Significant price volatility, combined with the inherent difficulties of valuing cryptoassets reliably, places retail consumers at a high risk of suffering losses from trading crypto-derivatives," said Sheldon Mills, interim executive director for strategy and competition at the FCA.
"We have evidence of this happening on a significant scale."
Global Digital Finance, an industry body that promotes best practices and conduct standards in cryptoassets, said the "drastic" move singled out cryptoassets unfairly.
"This ban kills off what could have been a new investment opportunity for sophisticated retail investors. It also sends a negative signal regarding the UK's stance on cryptoassets," said Lawrence Wintermeyer, executive co-chair of Global Digital Finance.
The products were popular with young male investors in particular, the FCA said, noting that most respondents to its consultation had opposed a ban, arguing that cryptoassets have intrinsic value and some like Bitcoin are accepted by companies such as Starbucks and Microsoft as a form of payment.
"We remain of the view that the price of cryptoassets is determined by sentiment and speculative behaviour," the FCA said.
(Reporting by Huw Jones; Editing by Susan Fenton and Sujata Rao)
By Huw Jones