The Commodity Futures Trading Commission (CFTC) is warning investors about the dangers of cryptocurrencies.

It  issued its fourth customer advisory on Monday, urging caution when buying digital coins or tokens and viewing “any promises or guarantees of future value as a ‘red flag.’ … There is no such thing as a guaranteed investment or trading strategy … The market for digital coins is still very young and there is no widely accepted standard to assigning a value on a particular virtual coin or token.”

In addition, many initial coin offerings (ICOs) have been identified as frauds, according to the CFTC.

It recommends that individuals considering the purchase of a digital coin or token consider “extensive due diligence on any individuals and entities listed as affiliates of the coin or token offering.” If potential investors can’t easily find that information, that, too, can be a red flag, the CFTC warns..

Other questions investors should ask before investing in  digital coins or tokens, according to the CFTC include:

  • Whether the digital coins or tokens are securities and if the offering is registered with the SEC. Investors can search the SEC.gov site’s Form S-1.
  • How the money will be used, whether it can be returned to investors and what rights the coin or token provides investors. “These rights should be clearly spelled out in the business plan, white paper or development plan. Make and keep copies of this information.”

The CFTC suggests that potential investors also weigh other factors that could impact the current or long-term value of cryptocurrencies including future competitors and technology changes that could disrupt the business, the market liquidity of specific digital coins or tokens and the purpose of the coin or token sale.

Many businesses in the proposal stage may use the money collected from coin sales to start or grow their business, according to the CFTC. It’s also common for a company to require that the digital coins or tokens be redeemed for investors to purchase the company’s products or services. In that case, the company may contend that as its products or services become more popular, the value of its coins or tokens will increase, providing potentially more profit for investors in the  future.

The CFTC advisory notes that investors can report fraud to CFTC.gov/TipOrComplaint.

— Check out ‘This Is Not a Passing Fad’: CFA Exam Adds Crypto, Blockchain Topics on ThinkAdvisor.