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Why Investing in Digital Currencies Like Bitcoin Is So Dangerous...
Traders Magazine Online News, January 23, 2018
If you've been even slightly tempted to invest in digital currencies such as Bitcoin, Ripple, or Etherium, you might want to listen to Warren Buffett. In a recent interview on CNBC, the investing guru said he feels almost certain that putting money in this market "will come to a bad ending."
By now, everyone has heard about the mania over cryptocurrencies—a form of encrypted digital money that average investors can trade just like stocks. The frenzy was sparked by Bitcoin, the oldest and most well-known cryptocurrency, which soared more than 1,900 percent in 2017 to around $20,000, before falling to around $14,000 this month.
There are now hundreds of other such currencies that can be traded—and new ones are regularly being created. Eastman Kodak, for example, just announced Kodakcoin, a cryptocurrency for photographers to use to manage rights and fees for their work. The company's shares rose 245 percent on the news.
But don't be fooled.
“People are desperate for anything that can bring them instant wealth, but [cryptocurrencies] are very risky investments because the technology is new and unproven,” says Jerry Brito, executive director of CoinCenter, a D.C.-based nonprofit research and advocacy group focused on the public policy issues facing the cryptocurrency. “You shouldn’t invest in stuff you don’t understandand you shouldn’t be investing money that you can’t afford to lose,” he says.
If that isn't enough to deter you, we've got four other reasons. Read on.
Fraud and Security Issues
The most popular way to buy and sell cryptocurrencies is through an exchange, where buyers and sellers come together online to trade.
But regulators, including the Consumer Finance Protection Bureau and the Securities and Exchange Commission, which since July has become much more active in cryptocurrency oversight, have been warning that some exchanges are fake. Unsuspecting investors can easily open an account at a fraudulent exchange and submit money to buy, say, Bitcoin. But the criminals steal the money and the investor never receives the Bitcoin.
Even legitimate exchanges may not have adequate security in place. Last month, a prominent South Korean exchange was forced to shut down after being raided by hackers who stole the cryptocurrencies. In such cases there is very little authorities can do to recover the funds.
Matt Mitchell, a tech security researcher, says that while lax security is a big risk, there are some exchanges that have invested in technology to lock down their systems. Among them, he says, are Coindesk, GDax, and Kraken.
Initial Offerings Provide Few Protections
For some investors, one attraction of cryptocurrencies is the ability to participate in an initial coin offering, or ICO. Investors jump in, hoping to get the digital currency at a low price and then profit as it rises.
But ICOs, are far riskier than stock IPOs—and have other key differences.
For one thing, in an IPO, the average investor can't easily participate, says Christina Tetreault, staff attorney for Consumers Union, the policy and mobilization division of Consumer Reports. Companies going public award their shares to institutional investors, which may then make them available to their customers as long as their income meets certain thresholds. In this way, average investors can't take undue risks that could wipe them out.
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