The breakdown on cryptocurrency, the risks

Understanding Cryptocurrency

IDAHO FALLS, Idaho (KIFI/KIDK) - With cryptocurrencies continuing to attract headlines over the past several months, the Idaho Department of Finance says to approach investing in them with caution.

"I think it defies logic when you invest in something that has no asset backing its value. It sounds appealing because you've watched the price of these cryptocurrencies just skyrocket, especially over the last 12-18 months. And so everybody wants to be a part of that get-rich quick mania and everybody has a story of someone that they know who's made a fortune on it," said Jennifer Landon, a financial advisor with Journey Financial Services, Inc.

Cryptocurrency is a form of exchange that's created and stored electronically in blockchains.
Blockchains are distributed public databases that keep a permanent record of digital transactions.

"When you purchase a stock, you are purchasing an asset. You have ownership in a company. But when you're purchasing a cryptocurrency, its not an asset, it's part of what they call a blockchain," Landon said. "And the blockchain doesn't really have any value, and even when it's initially sold, it's expected to have a zero value, but can be traded for other cryptocurrencies or other products and services."

Current common cryptocurrencies include Bitcoin, Ethereum and Litecoin. Unlike the dollar bill, cryptocurrency has no physical form and is typically not backed by tangible assets. In addition, there is little to no regulation, leaving many investors susceptible to theft.

"The financial services industry as a whole hasn't really embraced the cryptocurrency craze. A lot of companies have told their advisers that they will not participate in it in any way, shape or form. A lot of mutual fund companies have made it quite clear that they will not be investing in any of these types of currencies as well," Landon said.

The risk is high. In December, the North American Securities Administrators Association identified cryptocurrency-related investments as an emerging investor threat for 2018.

"The challenge is, we have to use logic when we're making investment decisions. And in something that is so volatile and so risky, you certainly wouldn't want to make an investment greater than what you're willing to lose," Landon said.

The Idaho Department of Finance lists the following concerns as to why experts are saying to use caution if you're interested in investing:

  • Cryptocurrency has to minimal regulatory oversight, and is susceptible to cyber-security breaches or hacks -- there may be no way to get your cryptocurrency back should it disappear...
  • Cryptocurrency accounts are not insured by the Federal Deposit Insurance Corporation (FDIC)...
  • Investors will have to rely upon the strength of their own computer security systems...

In addition, here are some common red flags of fraud:

  • "Guaranteed" high investment returns -- there is no such thing as guaranteed returns with *any* investment... And there is no guarantee that any coin will increase in value...
  • Unsolicited offers -- be very careful of communication about investment opportunities that you didn't ask for...
  • If the project sounds too good to be true -- it probably is... Watch out for exaggerated claims about future success...
  • Pressure to buy immediately -- take time to research an investment opportunity before handing over your money. 
  • And unlicensed sellers -- the Department of Finance can help investors determine if those pitching any investment scheme are registered with the department.

Wyoming, Hawaii and Minnesota are the only three states where their regulations makes it impossible to operate and use virtual currency.

To learn more about cryptocurrencies, such as bitcoin, click here for a more in-depth video about the risks involved.

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