Investor Alert: Risks In Investments Tied to Digital Currencies

Feb 25

In the wake of recent turmoil in the market for Bitcoins, Texas Securities Commissioner John Morgan today urged investors to consider investment risks associated with digital currencies.

“Although digital currencies such as Bitcoin are often touted as a sophisticated, online alternative to traditional currencies, investors shoud realize these curriencies are not tangible, they are not issued by a government, and are not currently subject to traditional regulation or monetary policy,” Morgan said.

Digital currencies are essentially long lines of computer code that may be encrypted and sent or received without involving a financial institution or government agency, Morgan said. “In many ways, digital currencies operate as ‘online cash,’ only this type of currency is extremely volatile and can disappear the same way your money disappears when you lose your wallet.”

Bitcoin, a specific type of digital currency, has recently garnered widespread attention due to fluctuations in its reported value and its increasing acceptance in electronic commerce. Although Bitcoin and other digital currencies are becoming more popular, they present significant risks when part of a securities offering.  These risks include the following:

  • Questionable security of the exchanges dealing in Bitcoins and other digital currencies, highlighted by Mt. Gox, the Japan-based Bitcoin exchange that apparently ceased operations Feb. 24. A reported series of security breaches at Mt. Gox may have caused the loss of 6% of the Bitcoins of circulation.
  • Digital currencies may be highly volatile, and their value can dramatically rise or fall in a relatively short period of time. These considerable fluctuations in value may present significant risks when investment programs are tied to demand for digital currencies or the price of digital currencies. Accordingly, investment programs associated with digital currencies may not be suitable for many investors, especially those prioritizing safety and security or planning for retirement.
  • Digital currencies exist only on computers and are almost always used as part of transactions that are effectuated through cyberspace. The electronic nature of digital currencies may provide fertile ground for hackers, who may be able to remotely compromise computer security systems and effectively steal digital currencies. Investors are therefore highly reliant upon their own computer security systems, as well as those provided by other parties, to protect investment programs tied to digital currencies.
  • Digital currencies may provide promoters with a significant degree of anonymity.  Unscrupulous promoters may be able to exploit the anonymous nature of certain digital currencies to conceal their true identity and assist in the concealment and laundering of the proceeds of a fraudulent investment offering.
  • Securities offerings that incorporate digital currencies may be highly dependent upon their growth and acceptance in retail and commercial marketplaces.  Also, any change in consumer confidence, user demographic or governmental regulation, or the introduction of new and competing forms of digital currencies, may negatively affect the liquidity or value of such securities offerings.