Consumer Financial Protection Bureau
Categories: Bitcoin
Thus, many people purchase Bitcoin for its investment value rather than its ability to act as a medium of exchange. However, the lack of guaranteed value and its digital nature means its purchase and use carry several inherent risks. For example, many investor alerts have been issued by the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the Consumer Financial Protection Bureau (CFPB) regarding Bitcoin investing.
Regulatory risk: The lack of uniform regulations about Bitcoin (and other virtual currencies) raises questions over their longevity, liquidity, and universality.
Security risk: Most individuals who own and use Bitcoin have not acquired their tokens through mining operations. Rather, they buy and sell Bitcoin and other digital currencies on popular online markets, known as cryptocurrency exchanges. Bitcoin exchanges are entirely digital and—as with any virtual system—are at risk from hackers, malware, and operational glitches.
Insurance risk: Bitcoin and cryptocurrencies are not insured through the Securities Investor Protection Corporation (SIPC) or the Federal Deposit Insurance Corporation (FDIC). Some exchanges provide insurance through third parties. In 2019, prime dealer and trading platform SFOX announced it would be able to offer Bitcoin investors with FDIC insurance, but only for the portion of transactions involving cash.10
Fraud risk: Even with the security measures inherent within a blockchain, there are still opportunities for fraudulent activity. For instance, in July 2013, the SEC brought legal action against an operator of a Bitcoin-related Ponzi scheme.11
Market risk: As with any investment, Bitcoin values can fluctuate. Indeed, the value of the currency has seen wild swings in price over its short existence. Subject to high volume buying and selling on exchanges, it is highly sensitive to any newsworthy events. According to the CFPB, the price of Bitcoin fell by 61% in a single day in 2013, while the one-day price drop record in 2014 was as big as 80%.