Beware of Bitcoin? Regulators Issue Warnings for Investors

Bitcoin is one of the hottest investment stories right now. Over the past few years, this new type of digital currency has exploded in value and caught the attention of investors across the World. However, the excitement behind Bitcoin’s gains might also be masking some serious issues. The SEC and FINRA have both released fairly strong warnings for people considering buying Bitcoins.   

Bitcoin Basics

Bitcoin is a new type of currency that only exists in digital form as a computer file. Instead of paying for something with cash or credit card, users can send over Bitcoins if the seller is willing to accept them. The value of each Bitcoin is determined by the market and fluctuates each day.

The unique thing about Bitcoin is that it is not monitored or run by a centralized government. Instead, it was developed by an anonymous programmer. The Bitcoin system is set up so that there is a limit of number of coins that will ever be released.

FINRA Warns Against Bitcoin Risks

FINRA recently released several warnings to new investors considering buying Bitcoins. First, FINRA pointed out that Bitcoins are not an official currency like the dollar or Euro. Vendors are not obligated to accept Bitcoins and if people decide they no longer want to use this currency, its value will plummet.

Payments with this currency are anonymous so once you pay with Bitcoins, it is nearly impossible to reverse the transaction. You do not have the same protections you would get with a credit card or bank account. Finally, FINRA noted that hackers often try to steal Bitcoins while scammers try to trick people into paying them in Bitcoins. Once again, the anonymous nature of Bitcoins makes them ideal targets for thieves.

 SEC Issues Additional Warning Against Fraud

The SEC has also cautioned investors about the fraud risks of Bitcoin. This warning partially came out in response to a large case of fraud in a Japanese company, Mt. Gox. Hackers attacked the company and stole 650,000 bitcoins, worth hundreds of millions of dollars. Mt. Gox declared bankruptcy and investors who lost Bitcoins saw all their money disappear.

There are also concerns that speculators are using online programs known as bots to illegally manipulate the value of Bitcoin, say by artificially pushing up the price and then dump selling a large number of coins. A new report indicates this may have happened during the Mt. Gox incident. Since Bitcoin is not regulated like stocks, bonds, and other currencies, there is more risk for speculation and price swings are much more severe. Over the course of the year, Bitcoin has jumped from $100 a coin, to $1,200, back down to around $600 today.

Handling this Investment

 Neither regulatory agency is telling investors to not buy Bitcoins. The point they are trying to make is that this new currency is highly speculative and carries much more risk than traditional investments. If your clients want to put some money into Bitcoins, make sure they only invest money they can afford to lose.