Regulators as well as financial advisors, despite the buzz that it continues to create, have begun cautioning consumers about virtual currency Bitcoins.
Recently the Washington State Department of Financial Institutions began issuing alerts about the risk of Bitcoins, including its extreme volatility as well as its vulnerability to hacking both on a peer-to-peer platforms and through a person’s “virtual wallet” that they use to store their virtual investment.
A bulletin posted by the State Department in Washington read “As Congress, state and federal regulatory bodies determine whether to or how best to oversee the virtual currency market, it would be wise for consumers to consider the risks of holding virtual currencies for investment or as a currency.”
Bitcoins have certainly caught the attention of consumers, with price fluctuations that sent it as high as nearly $1200 last year. Current prices have brought it down to about $600 per bitcoin ‘token’ and, as several funds begin to invest in the currency and businesses begin to accept it, including Lord & Taylor, consumer interest continues to grow.
Recently however one of the leading exchanges for bitcoins, Mt.Gox, said that it had lost some 850,000 bitcoins to hackers and filed for bankruptcy protection. The amount lost is equal to approximately $520 million at current market prices.
Since buying or speculating on bit coins is rather risky, as far as investing goes, Washington hopes that these alerts will give consumers a bit of context about what they’re getting into. “It’s natural to want to get in on the ground floor of new opportunities,” she said. “We all want to make a high return for little investment upfront.” said Gerri Walsh, president of the FINRA Investor Education Foundation.
Bill Beatty, a securities administrator for Washington state DFI, says that like any investment an investor should understand exactly what you’re getting into and, if it doesn’t make sense, they probably shouldn’t invest. That goes for bitcoins as well as any other investment.
“Volatility, security—that’s all true,” said Jim Harper, global policy counsel for the Bitcoin Foundation. “The risks around bitcoin are real.” Harper also added that the alerts should only be interpreted as repetitions of the risks that are already known rather than cause people to be concerned that the risk is growing. He added that, with regulation and advancements in technology, security issues surrounding bitcoins will likely decline over time.
JJ Burns, a certified financial planner from Melville New York, says that most consumers should still steer clear of bit coins for now “This goes way outside the scope of being a prudent investment for just about everyone,” he said. He added that, like any high-risk investment, only a small amount of consumers portfolio should be invested in bit coins and that an investor should “Be prepared to lose 100 percent of your investment—that’s the kind of attitude you need to have.”
To be sure, the warnings from regulators weren’t only about Bitcoins but also about the scams and hackers that are taking advantage of the fact that it’s a virtual currency. “Bitcoin has a lot of the things we see that fraud artists latch onto: It’s new, it’s high tech, it’s gotten a lot of press,” said Beatty. Last year for example, a man in Texas was charged by the SEC with running a Ponzi scheme that involved bitcoins.
All of that adds up to more risk than some consumers should consider taking.