Over the past several months, I have been answering a lot of questions about cryptocurrencies. The questions started with bitcoin and have moved into the several hundred other cryptocurrencies that have started since. There is a strong temptation to get a hold of something that can bring you instant wealth. However, investing in something new and unproven, and that you don’t fully understand, is never a good idea.
Cryptocurrencies are a form of encrypted digital money that average investors can trade just like stocks. The frenzy started when bitcoin soared more than 1,900 percent in 2017 to $20,000. Currently, bitcoin is trading at a little over $6,000.
Our reasons for staying away from these cryptocurrencies are easier to understand than the actual underlying investment.
The most popular way to buy and sell cryptocurrencies is through an exchange—not like a stock exchange but one on a website where buyers and sellers come together to trade.
- The Consumer Finance Protection Bureau and the SEC have warned consumers that these exchanges are often fake, taking the deposits of would-be investors.
- On Friday, June 8, The Wall Street Journal reported that regulators are investigating potential price manipulation at four MAJOR cryptocurrency exchanges.
- A new report from Ernst & Young provides some hard numbers on questionable transactions. There were 372 initial coin offerings that occurred between 2015 and 2017, of which E&Y found that more than 10% of the funds were stolen.
Even if the exchange is fair and verifiable, you still face security issues.
- Earlier this month, a small South Korean Exchange tweeted that they were hacked. Bitcoin fell 10% as a result of concern.
- “Cryptocurrency transactions are typically not reversible. Blockchains are decentralized payment systems, so there is no central power that can reverse a transaction that wasn’t right.” – Paul Brody, Ernst & Young Global Innovation Blockchain Leader.
- In January, hackers stole about $530 million from Coincheck, the leading bitcoin and cryptocurrency exchange in Asia. More of these types of attacks against exchanges are expected.
Ultimately, we believe that even without the complex nature of cryptocurrencies and blockchain, the risks associated with owning these currencies are too great and uncontrollable.
Warren Buffett summed it up best in a recent interview with CNBC. He said he feels almost certain that putting money in this market “will come to a bad ending.”