The US Commodity Futures Trading Commission issued a customer advisory to inform the public of possible risks associated with investing or speculating in virtual currencies or recently launched Bitcoin futures and options. “Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status,” the CFTC said. Further, virtual currencies are sometimes exchanged for US dollars or other currencies, but they are neither backed nor supported by any government or central bank.
Moreover, “Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional fiat currencies,” added the agency. “Profits and losses related to this volatility are amplified in margined futures contracts.” For investors in cryptocurrencies looking to hedge against potential losses or to buy virtual currencies at some point going forward, futures contracts and options are ways to protect against this volatility. “However, like all futures products, speculating in these markets should be considered a high-risk transaction,” the CFTC warned.
What makes virtual currency risky? “Purchasing virtual currencies on the cash market – spending dollars to purchase Bitcoin for your personal wallet, for example – comes with a number of risks,” it continued.
- Most cash markets are not regulated or supervised by a government agency;
- Platforms in the cash market may lack critical system safeguards, including customer protections;
- Volatile cash market price swings or flash crashes;
- Cash market manipulation;
- Cyber risks, such as hacking customer wallets; and/or
- Platforms selling from their own accounts and putting customers at an unfair disadvantage.
Also, “Virtual currencies are commonly targeted by hackers and criminals who commit fraud,” said the agency. “There is no assurance of recourse if your virtual currency is stolen.”
That’s why it is important if you intend to invest in a Bitcoin IRA or other cryptocurrency that you do your homework when choosing a custodian. The custodians with whom CoinIRA works are among the highest-rated and most secure in the industry and will ensure that your cryptocurrency assets won’t be susceptible to hacking or other nefarious activity.