Crypto currency basics and risks - Ben Schlueter, FA
WHAT ARE CRYPTOCURRENCIES?
Cryptocurrencies represent digital units that are utilized to facilitate online transactions without the need for a central intermediary to process. The transactions are digitally recorded on a public ledger. As of May 2021, per CoinMarketCap, more than 10,000 cryptocurrencies, also known as coins, have been launched as there are minimal barriers to launching new coins. Almost all cryptocurrencies have no intrinsic value.
HOW DO CRYPTOCURRENCIES COMPARE TO TRADITIONAL CURRENCIES OR INVESTMENTS?
Unlike traditional, government-issued currencies, cryptocurrencies are not sponsored by a government authority, are largely unregulated and confer no claims against any assets. Moreover, due to price volatility and transaction costs, cryptocurrencies are rarely used to conduct typical financial transactions. Consequently, cryptocurrencies are not widely accepted mediums of exchange. Given the lack of utility as payment mechanisms, the majority of the interest in cryptocurrencies has been for their use as speculative investment vehicles, largely based on the perception that their value will increase due to codified supply limitations and excitement regarding the potential application of blockchain technology.
WHAT ARE THE BIGGEST RISKS ASSOCIATED WITH SPECULATING IN CRYPTOCURRENCIES?
Many cryptocurrencies do not have any intrinsic economic value nor do they generate cash flows such as interest payments or dividends. Currently, the primary rationale for investing in cryptocurrencies is speculation that the market for cryptocurrencies will grow and that prices will rise. Additional risks include, but are not limited to:
- Absence of regulatory oversight or investor protections – Cryptocurrencies are not regulated by any government agency or central bank.
- Cybersecurity risk – Cryptocurrencies are bought, sold and stored online, which makes all parties in the cryptocurrency custody chain vulnerable to cyberattacks and breaches.
- Custody and clearing – Many of the custody and clearing standards used to trade securities have not been implemented by cryptocurrency exchanges.
- Concentrated ownership – A large number of cryptocurrencies are controlled by early adopters who are unlikely to sell, which contributes to price volatility.
Financial Industry Regulatory Authority (“FINRA”) and the Securities and Exchange Commission (“SEC”) have issued multiple warnings to investors regarding the risks associated with cryptocurrency. The biggest risk factors surrounding cryptocurrency issuers include that they are not registered with the SEC (or local country regulator) and can be exploited by criminals for money laundering and terrorist financing making the source of funds difficult to follow and verify.
Prior to making any investment decision, consult with your financial, tax and legal advisors about your individual situation. The prominent underlying risk of using cryptocurrencies as a medium of exchange is that it is not authorized or regulated by any central bank. Cryptocurrency issuers are not registered with the SEC, and the cryptocurrency marketplace is currently unregulated. cryptocurrencies are very speculative investments and involve a high degree of risk. Investors must have the financial ability, sophistication, experience and willingness to bear the risks of an investment, including the potential total loss of their investment.
Securities that have been classified as Cryptocurrency-related cannot be purchased or deposited in Reynolds Wealth Management or Raymond James client accounts.