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8 Warnings for Bitcoin Investors

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Commonwealth Secretary William F. Galvin, Massachusetts’ top securities regulator, is warning investors in his state and beyond not to get caught up in Bitcoin speculation.

“Bitcoin is just the latest in a history of speculative bubbles that most often burst, leaving the average investors with a worthless product,” Secretary Galvin said in a statement. “Going back to the 1600s with tulip mania to the present Bitcoin craze, chasing the next best thing will, more often than not, end in disaster for the average investor.”

Bitcoin futures began trading on the Chicago Board Options Exchange (Cboe) earlier this week. Proceeds from initial coin offerings have surpassed $4 billion this year, Bloomberg News reported Wednesday.

According to Galvin’s office, Bitcoin has “been the target of major hacks at the exchange and wallet levels, leaving many Bitcoin holders with huge losses.”

Bitcoin futures expiring in January were 18% higher and traded at $17,710 as of 12:25 p.m. in New York on Monday. That was up from an opening level of $15,000, on 3,561 contracts traded during their debut, according to the exchange.

As of Thursday at noon, the January futures traded at $16,610.

Trading on the exchange “gives Bitcoin an air of legitimacy,” the regulator’s office says; however, there are “inherent risks” associated with investing in the cryptocurrency and “fraudulent schemes associated with it.”

Bitcoin, of course, is attracting media attention as its price swings up and down.

Late Monday, Securities and Exchange Commission Chairman Jay Clayton issued a warning to investors and advisors about the cryptocurrency and ICO markets. “To date, no initial coin offerings have been registered with the SEC,” Clayton said in a statement.

Galvin’s Warning List

Before buying Bitcoin or assets associated with it, Galvin’s office suggests investors carefully consider the following facts and suggestions:

(Photo: Thinkstock)

1. Bitcoin and other virtual currencies are not regular money and are not backed by the United States or any other government or central bank.

2. Carefully investigate the seller before making a purchase of Bitcoin to know what recourse you would have if something went wrong.

3. Compare the fees and costs associated with Bitcoin purchases and get details on the terms for redeeming Bitcoin into regular money.

4. Virtual wallets that store Bitcoin do not provide the same safeguards as deposits made at traditional banks; thus, unrecoverable losses may occur if Bitcoin is stolen from these virtual wallets.

(Related: Will Bitcoin Fever Push 2018 Price to $20,000? $100,000?)

(Photo: Thinkstock)

5. Bitcoin values fluctuate enormously and may do so in short periods of time; investors should prepare for radical value changes in Bitcoin investments, including single-day drops or increases in the thousands of dollars.

6. Bitcoin investing is considered to be highly speculative, since the value is not related to any economic or financial parameters; it is advisable not to speculate with money that investors cannot afford to lose.

7. Bitcoin and other virtual currencies are based on public ledgers called blockchains, which are still experimental and subject to changes, errors and/or criminal activity that may adversely affect virtual wallets or erase Bitcoin value.

8. The unregulated and ambiguous nature of Bitcoin is fertile ground for investment scams and other financial fraud, which may cause investors to lose money. 

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