AZ Investor

Virtual Currency as an Investment

What Every Investor Should Know

What is virtual currency?  Unlike traditional currency, these alternative currencies are not typically backed by tangible assets, are not issued by a governmental authority and are subject to little or no regulation. The value of virtual currencies may be highly volatile and the concept behind the currency is difficult to understand even for sophisticated financial experts. Investors should be aware that investments that incorporate virtual currencies present very real risks.

The Commission’s Securities Division urges investors not to make substantial investments into this type of risky investment without first considering some important issues. Some common concerns investors should consider:  

• Virtual currency is subject to minimal regulation, susceptible to cyber-attacks and there may be no recourse should the virtual currency disappear.
• Virtual currency accounts are not insured by the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits up to $250,000.
• Investments tied to virtual currency may be unsuitable for many investors due to their volatility.
• Investors in virtual currency will be highly reliant upon companies that may lack appropriate internal controls and may be more susceptible to fraud and theft than other financial institutions.
• Investors will have to rely upon the strength of their own computer security systems, as well as security systems provided by third parties, to protect their e-Wallets from theft.

Virtual Currencies as an Investments

Commodities—Cryptocurrencies or virtual currencies can be used as an investment in essentially the same way as gold and other commodities. Investors can buy virtual currency with the expectation of being able to sell them at a higher price in the future. This can be highly speculative since the value of virtual currencies can fluctuate dramatically in the same day and each exchange can value the virtual currency differently. For details, see a NASAA Investor Alert: Commodities-Are You An Informed Investor?. 

ETF—A traditional Exchange Fund (ETF) tracks a basket of stocks or a commodity and trades in a stock market. An "ETF" can be composed only of virtual currencies, each with a value that fluctuates differently. For details, see a NASAA Investor Alert: Exchange-Traded Funds (ETFs)—Are you an Informed Investor? 

Derivatives—A derivative is a financial product with a value that is derived from a principal asset (such as stocks, bonds, or "Bitcoins") as contained by agreement between the parties. The most common types of derivatives are futures, guarantees, convertible bonds and exchange or exchange agreements.  In those cases, the investor bets on the change in the price of the virtual currency. For details, see Derivatives—Are you an Informed Investor?. 

For more information about the risks virtual currency as an investment, read the Corporation Commission's Investor Alert on Virtual Currency and visit the Fraud Prevention Center. Also, check out Initial Coin Offerings (ICOs)—What to Know Now and Time-Tested Tips for Investors | FINRA.org

Other Resources

Commodity Futures Trading Commission (CFTC)

• CFTC Advisory on Cryptocurrency and Scams (Apr. 2021)
• A CFTC Primer on Virtual Currencies (Oct. 2017)
  
• Customer Advisory: Understand the Risks of Virtual Currency Trading (Jan. 2018)

North American Securities Administrators Association (NASAA)

• NASAA Informed Investor Advisory:  Virtual Currency (Apr 2014)
• Be Cautious of the Cryptocurrency Craze (April 2018)

US Securities and Exchange Commission (SEC)

• Statement on Cryptocurrencies and Initial Coin Offerings (December 11, 2017) 

Financial Industry Regulatory Authority (FINRA)

• Don’t Fall for Cryptocurrency-Related Stock Scams (Dec. 21, 2017)

The information provided on this website is not comprehensive, is not offered as legal or investment advice, and is not a substitute for competent legal or financial counsel. The Securities Division provides this information to give you an overview of the topics discussed. You should not rely on the accuracy of this information, but should carefully review all applicable statutes and regulations with the assistance of legal counsel.