Reminiscent of the dot-com boom and bust of 20 years ago, investors are piling into Bitcoin.
Bitcoin, the cryptocurrency, has soared in value, starting this year at $1,000 and will likely hit $20,000 in the very near future.
In fact, Bitcoin is now in the “mania” phase, with some people even borrowing money to get in on the action, securities regulator Joseph Borg told CNBC on Monday.
Created in 2009, Bitcoin is a digital currency that is decentralized, swings wildly in value and can be used to launder money. At its launch, it had no value, but now is close to $20,000.
In early 2011, it gained parity with the dollar and briefly reached $1,000 in 2014. It has been on a wild ride in 2017, briefly hitting $19, 697 this month.
“We’ve seen mortgages being taken out to buy bitcoin. … People do credit cards, equity lines,” said Borg, president of the North American Securities Administrators Association, a voluntary organization devoted to investor protection. Borg is also director of the Alabama Securities Commission.
This is frightening. “This is not something a guy who’s making $100,000 a year, who’s got a mortgage and two kids in college ought to be invested in,” Borg said.
Adding to the fervor and increasing the risk, Bitcoin futures started trading on the CBOE Futures Exchange this month and the CME plans to launch its Bitcoin futures trading on Monday. While futures are regulated, Bitcoin is not.
Wonderful. Not only can rabid investors speculate on Bitcoin, they can also bet on Bitcoin futures, adding to the risk.
Investors buying Bitcoin seeking a get rich quick opportunity may be subject to investment fraud as we have seen in many other situations, like the dot-com bubble.
Thankfully, the government is paying attention. The Securities and Exchange Commission this month warned investors of the dangers of putting money into cryptocurrencies. The Commission said trading and public offerings in this new asset class may be in violation of federal securities laws.
In fact, the SEC recently stopped an initial coin offering or ICO after the company failed to register it as a security with the SEC.
“ICOs allow startups founded on cryptocurrency technologies such as blockchain to quickly raise capital by issuing virtual tokens to investors,” according to a report on CNBC. “Such offerings have become more common in the past year, but little data about them is available because the market has been largely unregulated.”
According to SEC Commissioner Jay Clayton, “A number of concerns have been raised regarding the cryptocurrency and ICO markets, including that …there is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud manipulation.”
Clayton echoed the time old maxim that “if an opportunity sounds too good to be true, or if you are pressured to act quickly, please exercise extreme caution and be aware of the risk that your investment may be lost.”
Investors flocking to Bitcoin mania must keep in mind that investment fraud scams surely follow hyped up investment activity. Investors need to take a deep breath, begin to understand how Bitcoin works and then, if they decide to dabble, do so with a very small percentage of their assets.
The laws of gravity apply to Bitcoin. Whatever goes up, must come down.
Zamansky LLC are investment and stock fraud attorneys representing investors in federal and state litigation and arbitration against financial institutions.