The price of the cryptocurrency Bitcoin rocketed through 2017 — from under $1,000 a unit to nearly $20,000 before pulling back — so it’s only natural to be curious.
It’s called FOMO: Fear of Missing Out.
Many may be wondering if they should invest in cryptocurrencies — digital currencies that aren’t backed by governments. There are different ways to get in the game, from creating a digital “wallet” at one of several sites and buying actual bitcoin or other cryptocurrency to investing in futures on an exchange.
Every investor is different, and no one knows what the future holds for digital currencies, but authorities from Asia to FINRA (the Financial Industry Regulatory Agency) want everyone to know cryptocurrency investing can be volatile and risky.
As the shady local warned a refugee couple in the film Casablanca, “I beg of you, Monsieur, watch yourself. Be on guard. This place is full of vultures, vultures everywhere, everywhere.” Then he stole their wallet.
“It is not a stable source of store value, and it doesn't constitute legal tender,” former Federal Reserve Chair Janet Yellen said at her final news conference in December. “It is a highly speculative asset, and the Fed doesn't really play any role, any regulatory role, with respect to bitcoin …”
The Canadian Securities Administrators (the country’s collection of securities regulators) in December issued a joint statement reminding financial professionals and investors “of the inherent risks associated with products
linked to cryptocurrencies, including futures contracts. While these contracts may be traded on regulated exchanges and may be cleared by regulated central counterparties, the fact remains that their high level of risk will not be suitable for all types of investors.”
And the North American Securities Administrators Association (NASAA) in January advised investors to use caution.
“The recent wild price fluctuations and speculation in cryptocurrency-related investments can easily tempt unsuspecting investors to rush into an investment they may not fully understand,” said Joseph Borg, NASAA president and director of the Alabama Securities Commission. “Cryptocurrencies and investments tied to them are high-risk products with an unproven track record and high price volatility. Combined with a high risk of fraud, investing in cryptocurrencies is not for the faint of heart.”
The Securities and Exchange Commission (SEC), supported NASAA’s stance.
For the curious, FINRA, the organization that oversees much of the financial services industry, produced a brief overview, Bitcoin Basics — 9 Things You Should Know About the Digital Currency.
The overview mentions things such as “Bitcoin supply is not controlled by any central government,” “Bitcoin is volatile,” “Bitcoin can be stolen,” and “Bitcoin’s origins are mysterious.”
And one more thing, FINRA notes, Bitcoin isn’t the only game in town when it comes to cryptocurrencies. There are more than a thousand.
But when has a rapidly rising investment where seemingly everyone was making money ever gone wrong? Vitor Constancio, vice-president of the European Central Bank, in September likened Bitcoin to a “tulip,” referencing the Dutch tulip bulb bubble of 1637 when, after years of speculative trading and rising prices, people came to realize … they’re just flowers.
Things to Consider
- Bitcoin and other cryptocurrencies are getting a lot of attention lately, but some of the world’s financial leaders have concerns.
- Former Federal Reserve Chair Janet Yellen called Bitcoin “highly speculative.”
- Bitcoin isn’t a physical coin, it’s a digital currency secured through codes that can’t be read without a key.
Consumer Fraud Protection Bureau: What Are Virtual Currencies and What Should I Know if I’m Interested in Using One?
Investopedia: What is Bitcoin?