Regulators across the country are warning investors about the volatility of Bitcoin, both as a currency and investment. I hope their warnings will be taken seriously, particularly in light of the recent events surrounding one of the major Bitcoin exchanges.
With no initial explanation, Tokyo-based Mt. Gox left customers unable to access their Bitcoin accounts. In a tersely written message on its website, mtgox.com, the company said the move was to "protect the site and our users." A subsequent note - three sentences long - from the company's chief executive also didn't shed light on what's happened to the company or the Bitcoins it held for customers, only that it has had "recent issues."
The company has since filed for bankruptcy protection, saying technical issues resulted in fraudulent withdrawals and as a result it has lost 850,000 Bitcoins, including 100,000 of its own, worth more than $400 million.
Throughout the shutdown, Mt. Gox hasn't been up-front with its customers. And therein lies the problem. The company didn't have to answer to any authority or regulator, so it didn't have to tell folks what was happening with their money.
In fact, digital currency made the North American Securities Administrators Association's list of new investor threats. "The value of Bitcoins and other digital currencies is highly volatile and the concept behind the currency is difficult to understand even for sophisticated financial experts," NASAA said in its alert.
Says association spokesman Bob Webster: "State securities regulators are concerned that the popularity of digital currency can provide con artists with fertile soil to grow a new generation of scams. Investors need to be aware that investments based on virtual money present real risks, including the possibility of being Bitconned."
Sen. Joe Manchin, D-W.Va., sent a letter to federal regulators calling for a ban on Bitcoins.
In a warning last week to investors, Joseph Borg, director of the Alabama Securities Commission, said: "The risk of using Bitcoin may be off the charts! When using Bitcoin for investing, it is difficult to seek any protection or recourse for losses due to fraudulent schemes."
Echoing other regulators, here's a rundown of Borg's specific concerns with Bitcoin:
* It's a high-risk commodity because of the volatility in its price.
* It's not backed by any central banks worldwide and has no tangible value.
* It's an experimental concept.
* It's unregulated and does not provide protection for consumers.
* Consumer disclosure rules and regulations are limited or nonexistent.
Consider its volatility. Rotunda points out that a Bitcoin was valued at less than $14 in January 2013 and jumped to $1,200 in November 2013. Most recently it dropped to about $400 following the news about Mt. Gox.
There are some benefits to digital currency. It could reduce the cost of financial transactions, especially from country to country. It could give people living in areas without financial institutions or stable currency a safer way to transact business.
Perhaps with more protections, Bitcoin or some other digital currency could take off and provide handsome returns. But right now, it's too risky for most investors.