Are Bitcoin Investments Safe?

Practice Areas Investment Fraud Bitcoin & Cryptocurrency Are Bitcoin Investments Safe?

Learn if Bitcoin is a Safe Investment for You with the Help of a Bitcoin Law Firm

Bitcoin has become a hot topic in the financial world in recent months, and stories abound of people becoming Bitcoin millionaires.  With all the buzz about Bitcoin and other cryptocurrencies, you may be wondering: is Bitcoin a good investment. Ultimately, only you can decide what your investment approach should be and whether Bitcoin is an investment that should be added to your portfolio. However, you should understand the risks and should consider talking with a Bitcoin law firm to understand the laws in place and the limitations of legal protections for your investment.

Are Bitcoin Investments Taxable? 

Bitcoin and other cryptocurrencies have become popular investment products, but if you’re not familiar with the cryptocurrency market, you may wonder: is Bitcoin safe and legal? The answer to this question depends upon the circumstances and it’s not a straightforward question to answer.  If you are considering making a substantial investment or have concerns about the money you have already invested, reaching out to a Bitcoin law firm could be important. The safety and legality of Bitcoin investments depend upon your intentions for the virtual currency and your actions in trading it.

Within the United States, there are no laws against buying and selling bitcoins. However, the IRS requires that you declare your Bitcoins as property. If you do not comply with the rules, you could be subject to penalties for violating tax laws.  Exchanges that sell Bitcoin are also covered by the Bank Secrecy Act, and Initial Coin Offerings, which are similar to IPOs, are also subject to regulation as security.

While you can buy and sell bitcoins, however, you cannot do so for an unlawful purpose such as money laundering. Attempting to use bitcoin for unlawful purposes can result in prosecution and could leave you faced with serious penalties.

You should not assume that your Bitcoin transactions will be untraceable, as Coinbase has already been ordered to turn over information about certain transactions to the IRS.  The confidentiality of your information is not guaranteed if there is a court order under any circumstances compelling any coin exchange or virtual wallet provider to turn over your account information.

Investing in cryptocurrencies and understanding the legal issues surrounding them is a very complicated prospect.

- Jacob H. Zamansky

Is Investing in Bitcoin a Good Idea? 

If you operate in accordance with regulations and do not use your Bitcoin for illegal activities, you should not face legal consequences in connection with Bitcoins. However, you should be aware that just because an investment is legal does not mean it is safe.

Investors in cryptocurrencies have lost substantial sums of money as a result of hacks. The loss of your password for your virtual wallet or another inability to access your public and private key necessary to prove your ownership of bitcoin could also result in your investment being lost forever.  And, if a coin exchange or virtual wallet disappears, is hacked, or is bankrupted, the FDIC does not insure your investments and you could lose everything.

All of these risks exist in addition to the fact that Bitcoin and other cryptocurrencies are simply a very volatile investments. The price has fluctuated greatly, and it is uncertain whether Bitcoin will become a widely-accepted currency in the long-term, resulting in coins being worth millions, or if it will eventually be worth nothing.

If you are considering investing in Bitcoin, you should talk with a Bitcoin law firm to find out how regulations do – and don’t – protect you and to ensure you understand your obligations so you can comply fully with the law.

So, Is It Worth Investing in Bitcoin? 

Bitcoin investing is also not yet subject to the same intensive regulations as other types of financial products like stocks. While there are many securities laws protecting investors in the stock, including requirements for publicly traded companies to make financial disclosures, the Bitcoin market is currently far less regulated.  Further, Bitcoin exchanges and virtual wallets are not FDIC insured, so if the wallet company where your Bitcoin is stored suddenly disappears or is hacked and your money is taken, the U.S. government does not guarantee your investment and you could lose everything with no recourse.

When deciding if you think Bitcoin is a good investment or not, you will also need to consider the price of coins at the time you are making a purchase. When Bitcoin was reaching values near $20,000, many believed that it was in a bubble or that a buying frenzy had artificially driven the price up much higher than it should be in the near-term.

Ideally, you don’t want to invest in Bitcoins at the height of the bubble and lose a significant portion of your investment immediately; however, if you believe that Bitcoin’s price is likely to increase significantly compared with where it is today and you intend to hold the investment for the long-term, buying when prices are high may not matter as much if you are not concerned about short-term losses.

Understanding the High Risks of Bitcoin Investments

The U.S. Securities and Exchange Commission (SEC) has recently warned that investors need to be cautious about investing in the Bitcoin futures market. In addition to the volatile and speculative nature of cryptocurrency futures, the SEC cautions that the market is prone to manipulation and fraud. Here, cryptocurrency lawyer Jake Zamansky discusses these risks and explains the options that are available to Bitcoin investors who suffer fraudulent losses.

As the SEC explains, “Funds that buy or sell Bitcoin futures may have unique characteristics and heightened risks compared to other funds.” As a result, investing in the Bitcoin futures market is something that should be reserved for highly experienced investors who have the financial resources to weather market downturns—and who can afford to lose their investment if the market crashes. The “heightened risks” of the Bitcoin futures market include:

• Lack of Regulation – While mutual funds and exchange-traded funds (ETFs) that hold Bitcoin futures are subject to federal regulation, the same is not true of the Bitcoin futures market itself. Due to this lack of regulatory oversight, there are greater opportunities for fraud artists to target unsuspecting investors.
• Bitcoin Volatility – As we have seen over the last few months, the Bitcoin market is extremely volatile. This volatility translates directly to the Bitcoin futures market. Thus, investors who buy into Bitcoin futures contracts, whether on their own or through a fund, face the risk of losing their investments. Fraud targeting the Bitcoin market is a significant consideration as well, as efforts to manipulate the market can (and often do) lead to significant price drops.
• Fraudulent Market Activity – Pump and dump schemes, social media campaigns, fake Bitcoin websites, email solicitations and various other forms of fraud have all impacted the Bitcoin market in recent years. These continue to be concerns for investors in both the “spot” Bitcoin market and the Bitcoin futures market.
• Inadequate Disclosure – When investing in Bitcoin futures through funds, brokerage firms, or investment advisors, investors should receive full disclosure of the risks involved. However, this does not always happen. A fraudulent nondisclosure is a common form of investment fraud, and it is one for which investors can pursue FINRA arbitration claims in many cases.
• Overconcentration and Unsuitability – Overconcentration and unsuitable investment advice are risks for individuals who invest in Bitcoin futures through funds, brokerage firms, and investment advisors as well. Whether investment professionals don’t understand the risks of investing in Bitcoin futures or they ignore them, this can also provide grounds for pursuing a claim in FINRA arbitration.

While there are undeniably serious risks, however, there could be a significant potential upside to investing in Bitcoin if you believe that this cryptocurrency will become a long-term trusted currency.  Some financial experts believe that a single Bitcoin could someday be worth millions if the coins become a long-term trusted source of currency, based on estimates regarding the number of coins in circulation and the number of coins lost.  However, if Bitcoin does not become a trusted currency that is utilized over the long term, then it is possible that the coins will someday be worth nothing and your entire investment will be lost.

Investing in cryptocurrencies and understanding the legal issues surrounding them is a very complicated prospect.

- Jacob H. Zamansky

Speak With Our Bitcoin Law Firm Today

If you are considering a substantial Bitcoin investment or if you have concerns about problems with your current investments, a Bitcoin and cryptocurrency attorney at Zamansky, LLC can help you. Give us a call today to find out more about the assistance we can offer.