By Kelly Griese
Wednesday, October 30, 2019
This week marks the 11th anniversary of Bitcoin. It’s one of the most talked about brand names in the fintech world, and for many people, it’s as synonymous with cryptocurrency. Think using Coke in place of soda, Kleenex in place of facial tissue, Chapstick in place of lip balm. There are even terms to define this phenomenon: genericized trademark or proprietary eponym. Essentially, the brand name becomes the common name we use to describe all similar products. In the case of Bitcoin, we often use it in place cryptocurrency, even though there are more than 2,900 different cryptocurrencies in existence.
So what is cryptocurrency and how does it apply to investing?
First, let’s define cryptocurrencies with some help from the North American Securities Administrators Association, or NASAA.
“Cryptocurrencies are digital assets created by companies or individuals that take the form of a virtual coin or token. Anyone can create a cryptocurrency. Cryptocurrencies are intangible and exist only on the internet. Central banks and other governmental authorities do not insure or control cryptocurrencies. You cannot always exchange them for other fiat currencies (i.e., currencies declared “legal tender” by governments), such as the U.S. or Canadian dollar or Mexican peso. Cryptocurrencies trade on unregulated, opaque exchanges on which there may be little or no opportunity to independently verify their true market value. And given the newness and uniqueness of cryptocurrencies and related instruments, they do not yet have a clear place in the existing framework of financial regulation.”
For some investors, the decentralized, unregulated nature of cryptocurrencies makes them MORE appealing, and fraudsters agree.
Fraudsters all too eager to exploit investors’ interest in the crypto craze. Here are some common schemes associated with cryptocurrencies:
Fake digital wallets – A digital wallet is used to store, send, and receive cryptocurrencies. Scammers design a fake digital wallet to lure users into providing their private key or code that enables the wallet to open. Once a scammer receives the private key, he or she can steal all the cryptocurrency from the owner’s digital wallet.
Pump-and-dumps – Groups of individuals coordinate to buy a thinly-traded cryptocurrency, promote the cryptocurrency on social media to push up demand and price, and then sell it in a coordinated sale. The price plummets and those unaware of the scheme are left with the devalued cryptocurrency.
Multi-level marketing platforms – Companies lure investors through the promise of high interest with low risk. These investors are then incentivized to recruit more members.
In an effort to combat cryptocurrency scams, the Indiana Securities Division joined forces with NASAA to investigate Initial Coin Offerings (ICOs) and cryptocurrency-related investment products. “Operation Cryptosweep” involves more than 40 NASAA members, including the Indiana Securities Division. To date, the operation has resulted in more than 330 inquiries and investigations and at least 85 enforcement actions. As part of the the sweep, the Indiana Securities Division filed a cease and desist order against Bionic for registration violations.
Before investing in crypto-related products, here are some common concerns you should consider:
Volatility - Cryptocurrency markets are highly volatile, making them unsuitable for most investors looking to meet long-term savings or retirement goals. To understand this volatility, just look to the Bitcoin crash of 2018. It was valued at $6,447 on October 31, 2017 before spiking to an all-time high of $19,068 on December 17, 2017 and returning to $6,283 as of October 30, 2018. Other cryptocurrencies experienced similar volatility.
No recourse - Cryptocurrency and many crypto-related investments are subject to minimal regulatory oversight, and there may be no recourse should the cryptocurrency disappear due to a cybersecurity breach or hack.
Untraceable - Cryptocurrency or crypto-related investments only exist on the internet. Issuers can be located anywhere in the world, so it may be impossible to trace and recover lost funds through the courts.
Uninsured - Cryptocurrency accounts are not insured by the Federal Deposit Insurance Corporation, or FDIC.
Unregulated - Cryptocurrency investors rely upon unregulated exchanges that may lack appropriate internal controls, making them susceptible to fraud, theft and hacking.
Hackable - Creating a digital wallet to store cryptocurrency involves installing software on an investor’s computer. As with any software download, hackers may include malicious code.
Vulnerable - Purchasers of cryptocurrencies rely on the strength of their own computer systems as well as systems provided by third parties to protect purchased cryptocurrencies from theft.
Last year, ahead of the 10th anniversary of Bitcoin, the Securities Division of the Indiana Secretary of State’s office released an investor advisory on the subject of cryptocurrencies. You can read it here. Additionally, NASAA created a short, animated video to help investors better understand cryptocurrency-related investing and the risks involved. You can view the video here.
The MoneyWise Matters blog has a wealth of information about managing money and avoiding fraud. You can look through the complete archive here.