Consumer protection agencies are getting worried about cryptocurrencies. The US Securities and Exchange Commission (SEC) issued an investor alert today warning about the risks of investing in bitcoin and other virtual currencies such as Peercoin, Dogecoin, and Minacoin.
This is actually the SEC's second cryptocurrency-related alert. The first was issued last summer after the agency prosecuted a man for running a pyramid scheme in the virtual currency. Meanwhile, the Financial Industry Regulatory Authority (FINRA) recently issued a similar alert, while the North American Securities Administrators Association (NASAA) added virtual currencies to its list of top 10 investor threats for 2013.
The SEC issues investor alerts a few times a year about popular schemes that cause people to part with their money. "A new product, technology, or innovation – such as bitcoin – has the potential to give rise both to frauds and high-risk investment opportunities," the agency says. "Potential investors can be easily enticed with the promise of high returns in a new investment space and also may be less skeptical when assessing something novel, new and cutting-edge."
"Potential investors can be easily enticed with the promise of high returns."
There are a few reasons why virtual currencies are especially risky, the SEC says. Most cryptocurrencies have irreversible transactions, which can make it more difficult to recover money. The services that function as banks for virtual currencies are also not required to have insurance. Meanwhile, fraudsters have identified the virtual currency community as a ripe target.
The SEC also notes that bitcoin and other currencies are very volatile, vulnerable to hackers, and may be restricted by governments. "As a recent invention, Bitcoin does not have an established track record of credibility and trust," the agency says.
There is no shortage of horror stories about people who have lost money investing in bitcoin and other virtual currencies. The recent closure of the Japan-based Mt Gox exchange resulted in frozen accounts with no guarantee of reimbursement. Even the lovable Dogecoin has been hacked, although people recovered their money thanks to donations. As the SEC says, do your research before handing over your money. Even if someone promises you a 32,000-fold return.