If you are tempted to join the cryptocurrency bandwagon, regulators say you must take a pause before you click “buy.”
Following bitcoin’s meteoric value rise in 2017 — from just below $1,000 in Jan to almost $20,000 in December — there is been a rush to make the most on cryptocurrencies and also the blockchain technology that makes them attainable.
Numerous investment vehicles are created to fulfill this surge in client demand.
In December, bitcoin futures began trading on 2 exchanges, the Chicago Board options Exchange and also the CME group. In January, Kodak saw its shares rise on the announcement of its “KodakCoin” digital currency. Even Venezuela is making moves into digital cash, with President Nicolas Maduro declaring the development of a “petro cryptocurrency” backed by the country’s oil and gas reserves.
But where some see opportunities, regulators are preaching caution. Last week, the Securities and Exchange Commission shot down proposals from 2 exchange-traded funds seeking to offer investors the simplest way to trade in cryptocurrencies on additional traditional exchanges.
ETFs have exploded in popularity in recent years and provide an easy means for people to diversify their investments. The funds hold a basket of investments, and investors can then purchase and sell the ETFs like normal stocks.
In this case, the 2 funds projected investment in cryptocurrencies. They’d enable investors to trade shares of the funds, with fund managers handling the selection and buying of the underlying crypto assets in their portfolios.
Cryptocurrency markets “feature considerably less investor protection than traditional securities markets, with correspondingly bigger opportunities for fraud and manipulation,” SEC Chairman Jay Clayton aforementioned in December.
For the SEC, cryptocurrencies are still too new and poorly understood to permit them onto additional conventional exchanges.
But the agency’s reluctance to permit crypto trading on stock exchanges has done very little to curb investor enthusiasm. Aspiring investors can still trade bitcoin and alternative currencies on a host of on-line exchanges. (Earlier this month, bitcoin costs plummeted and it absolutely was trading at around $11,000 on Thursday.)
Investors also can participate in “initial coin offerings,” where new coin developers sell their digital coins in exchange for startup capital. In contrast to traditional IPOs, most ICOs don’t provide investors a stake within the company. As a result, ICO curators claim that their activities fall outside of the SEC’s regulatory agency.
The SEC isn’t thus certain. “Fraudsters might lure investors by touting an ICO investment ‘opportunity’ as the way to get into this cutting-edge space, promising or guaranteeing high investment returns,” the agency aforesaid in an investor bulletin.
On Monday, SEC Chairman Clayton called out the financial advisers and lawyers behind several ICOs, saying “they can do better.”
Crypto investors ought not to look far to envisage what the SEC is warning about. Last week, BitConnect, an internet platform that guaranteed returns of up to 40 % per month, collapsed.
BitConnect failed shortly after receiving cease-and-desist orders from authorities in North Carolina and Texas.
Some distinguished figures in cryptocurrency, as well as Ethereum co-founder Vitalik Buterin and hedge fund manager-turned-crypto-investor Michael Novogratz, called this “too-good-to-be-true” venture a Ponzi scheme. Over the course of some days, BitConnect’s coin lost over 90 % of its worth. Investors were left with no way to withdraw their funds because the platform declared that it will be closing down. People who could found that their investments had shriveled to a fraction of their initial worth.
The problem is not restricted to BitConnect. New research from Ernst & Young reveals that over 10 % of the funds generated by ICOs are either misplaced or taken over by hackers. These attacks exploit flaws in the code of latest cryptocurrencies, several of which are rush to promote without significant review. It’s typically not possible to recover stolen funds as a result of the blockchain transactions that are irreversible. According to Ernst & Young, this 10 % represents a loss of regarding $400 million in investor money.