5 Digital Currency Risks Investors Should Know: NASAA

State securities regulators issue investor alert on virtual currencies like bitcoin

A 25-bitcoin token, worth $11,140 at the current exchange rate. (Photo: AP) A 25-bitcoin token, worth $11,140 at the current exchange rate. (Photo: AP)

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The North American Securities Administrators Association is warning investors to consider the risks associated with virtual currencies, particularly that the value of such currencies is volatile.  

In an investor alert, "What’s in Your e-Wallet?," NASAA explains that virtual currency is an electronic medium of exchange that can be bought or sold through virtual currency exchanges and used to purchase goods or services where accepted.

These currencies are gaining in both popularity and controversy and are stored in an electronic wallet, also known as an e-wallet, which is a digital system that allows payments online via a computer or mobile device. So-called cryptocurrencies are designed to make transactions difficult to trace.

“Unlike traditional currency, these alternatives typically are not backed by tangible assets, are not issued by a governmental authority and are subject to little or no regulation,” said Andrea Seidt, NASAA president and Ohio Securities Commissioner, in a statement.

“The value of virtual currencies is highly volatile and the concept behind the currency is difficult to understand even for sophisticated financial experts,” Seidt said. “Investors should be aware that investments that incorporate virtual currency present very real risks.”

The alert explains that a growing numbers of merchants, businesses and other organizations currently accept bitcoin, one example of cryptocurrency, in lieu of traditional currency. However, recently, one of the largest bitcoin exchanges, Mt. Gox, shut down after claiming to be the victim of hackers and losing more than $350 million of virtual currency.

“Despite the controversy, virtual currency may find its way into your e-wallet,” NASAA warns.

Before investing in any offering involving virtual currency, investors should consider that:

  • Virtual currency is subject to minimal regulation and susceptible to cyberattacks. There may be no recourse should the virtual currency disappear.

  • Virtual currency accounts are not insured by the Federal Deposit Insurance Corp. (FDIC), which insures bank deposits up to $250,000.

  • Investments tied to virtual currency may be unsuitable for most investors due to their volatility.

  • Investors in virtual currency will be highly reliant upon unregulated companies that may lack appropriate internal controls and may be more susceptible to fraud and theft than regulated financial institutions.

  • Investors will have to rely upon the strength of their own computer security systems, as well as security systems provided by third parties, to protect their e-wallets from theft.

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Check out 6 Bitcoin Risks for Investors: FINRA on ThinkAdvisor.

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