6 Bitcoin Risks for Investors: FINRA

In a new investor alert, FINRA warns about the dangers of buying and using digital currencies

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The Financial Industry Regulatory Authority on Tuesday warned investors of the top six reasons why buying and using digital currency such as bitcoin can be risky.

FINRA includes its list in a newly released investor alert, Bitcoin: More than a Bit Risky, which also states that while speculative trading in bitcoin carries significant risk, there is also the risk of fraud related to companies claiming to offer bitcoin payment platforms and other bitcoin-related products and services.

“Speculators drawn to bitcoin trading should understand that bitcoin prices have fluctuated widely, and wildly, almost from the currency’s inception,” said Gerri Walsh, FINRA’s senior vice president for investor education, in releasing the alert. “Investors looking to get in on the ground floor of a bitcoin-related company should realize that fraudsters may see the latest digital currency trend as a chance to steal their money through old-fashioned fraud.”

Here’s what FINRA says are six bitcoin risks:

--Digital currency such as bitcoin is not legal tender. No law requires companies or individuals to accept bitcoins as a form of payment. Instead, bitcoin use is limited to businesses and individuals that are willing to accept bitcoins. If no one accepts bitcoins, bitcoins will become worthless.

--Platforms that buy and sell bitcoins can be hacked, and some have failed. In addition, like the platforms themselves, digital wallets can be hacked. As a result, consumers can — and have — lost money.

--Bitcoin transactions can be subject to fraud and theft. For example, a fraudster could pose as a bitcoin exchange, bitcoin intermediary or trader in an effort to lure you to send money, which is then stolen.

--Unlike U.S. banks and credit unions that provide certain guarantees of safety to depositors, there are no such safeguards provided to digital wallets.

--Bitcoin payments are irreversible. Once you complete a transaction, it cannot be reversed. Purchases can be refunded, but that depends solely on the willingness of the establishment to do so.

--In part because of the anonymity bitcoin offers, it has been used in illegal activity, including drug dealing, money laundering and other forms of illegal commerce. Abuses could impact consumers and speculators; for instance, law enforcement agencies could shut down or restrict the use of platforms and exchanges, limiting or shutting off the ability to use or trade bitcoins.

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Check out Yellen: Fed May Pause Tapering if Weakness Persists; Can’t Regulate Bitcoin on ThinkAdvisor.

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