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Financial Education, Financial Resources

Virtual Bitcoin Carries Actual Risk

Consumers, beware: Buying and using digital currency such as bitcoin carries certain risks, according to the Financial Industry Regulatory Authority Inc. (FINRA), Washington, D.C.

bitcoin

Image courtesy of www.bitcoin.org

Bitcoin is an unregulated peer-to-peer payment system that uses its own currency, called bitcoin, to transact business. Bitcoins are not issued by banks or governments—the bitcoin platform was designed as an alternative to national currencies like the dollar, and to commodity-based currencies such as gold or silver coins.

Consumers can buy and sell bitcoins online or at physical locations. A growing number of physical establishments and exchanges allow customers to buy and sell bitcoins using cash, credit cards, money orders, and other methods. Bitcoins reside in a digital wallet, from which consumers use them to buy items from establishments that accept bitcoins.

While bitcoin and other virtual currencies hold promise for consumers and businesses alike, “Speculative trading in bitcoins carries significant risk. There also is the risk of fraud related to companies claiming to offer bitcoin payment platforms and other bitcoin-related products and services,” FINRA writes in an investor alert.

The alert cautions that:

  • Digital currency like bitcoin is not legal tender, and businesses and individuals are not required to accept it as payment. If no one accepts bitcoins, bitcoins will become worthless.
  • Platforms that buy and sell bitcoins, and digital wallets, can be hacked—at a cost to consumers.
  • Bitcoin transactions can be subject to fraud and theft.
  • The account insurance and other safeguards credit unions and banks provide are not provided to users of digital wallets.
  • Bitcoin payments are irreversible. Refunds are made only if a seller decides to provide them.
  • Bitcoin has been used in illegal activity, and law enforcement agencies could shut down bitcoin exchanges.
  • Bitcoin prices can fluctuate wildly.

Many criminals also view bitcoin “as a chance to steal your money through old-fashioned fraud,” FINRA adds. As is always true, warning signs of fraud include business claims that aren’t backed by financial reality, FINRA says.

Speculators have been drawn to bitcoin trading as a way to make a quick profit. But as with any speculative investment, from real estate to gold, you can lose money. With digital currency, profits or losses are virtually—as well as literally—impossible to predict.

Bitcoin prices have fluctuated widely, and wildly, almost from the currency’s inception. In short, bitcoin speculation is extremely risky. Never speculate with money you cannot afford to lose.



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