The Bitcoin phenomena experiences both record highs and lows this week, but…uhh, what the heck is it again?
It’s not like investing in Apple or IBM.
Cryptocurrencies with names such as Bitcoin, Ethereum, Litecoin and Ripple have captured the attention of people willing to take a chance on the latest investment craze. The market is blazing hot, unregulated, volatile and not for everyone.
“No guts, no glory,” said Kyle Brendle, house promoter at The Stone Pony in Asbury Park. He has made a “very modest” investment, which he described as a “purely speculative action.”
“There is a cryptocurrency craze in our country,” Brendle said. “I’ve really been trying to be a student of the whole thing for the last few months because there’s obviously a lot of people making a lot of money.”
How much? For instance, prices for Bitcoin have risen by more than 1,500 percent in the past year, ending the week at about $13,360, up from about $800. Bitcoin reached nearly $19,800 in mid December before a gut-clenching drop to about $12,570 a few days later, according to Coinbase, a U.S.-based trading platform.
It has securities regulators worried.
Fears of fraud
“We certainly have concerns for a number of reasons that there could be, potentially, frauds in or around the cryptocurrency markets,” said Christopher W. Gerold, chief of the state Bureau of Securities. “Whenever something is hot, you get a lot of nefarious individuals coming out of the woodwork and trying to maximize that and take advantage of people.”
Among regulators’ other chief concerns: The potential for cybersecurity breaches at trading sites, many of which are overseas, or on investors’ own systems containing the crypto coins they purchase. There’s also the unregulated nature of the investments and the susceptibility to volatile swings in price which makes them unsuitable for most investors, especially those investing for long-term goals or retirement.
“The more volatile an investment product is the more likely they could lose all their money,” Gerold said. “Unfortunately, other unsophisticated investors might perceive this as the next big thing and become over-concentrated in it and risk everything.”
What is cryptocurrency?
They don’t have a physical form, like a dollar bill or a quarter. They are created and stored electronically in what’s called the blockchain, a distributed public database that keeps a permanent record of all transactions.
Investors and supporters say it’s part of the decentralization of the economy. You no longer need a bank or big financial institution to transmit money and verify transactions. Via the blockchain, cryptocurrency can be traded around the world directly from one person to another, 24 hours a day, at only the cost of a very small fee. Some companies are even using cryptocurrency to raise funds for their projects.
‘Here to stay’
“Crypto is here to stay,” said Jennifer Crews, a tech entrepreneur in Red Bank.
She has a traditional investment portfolio but decided to put some money into cryptocurrencies too. “My oldest child is 9. It occurred to me that I should put money in because it may end up being a really big nest egg as well.”
Crews said she invests only what she’s prepared to lose, given the volatility, and is in it for the long term.
“I’m not moving money around, I’m letting it sit,” Crews said. “For people who can set aside some money and let it sit and have a long-term view, they will take advantage of the fact that once the dust has settled that their crypto money will be worth a lot. I really believe that.”
Crews and other investors interviewed by Press on Your Side wouldn’t comment on the size of their investments.
Tech entrepreneur Bret Morgan, co-founder of Cowerks in Asbury Park, spends a set amount on cryptocurrencies, such as Bitcoin and Etererum, every time. It’s part of an overall investment strategy that also includes traditional stocks.
“It’s very unpredictable and very wild, wild west,” Morgan said. “But I found that the way is to just consistently buy, don’t ever sell, just hold on to it, and just hang on and be prepared for wild swings.”
It’s also important to understand cryptocurrency and how it works. “I only invest in things I understand,” Morgan said.
He is “very, very happy” with his returns, he added. He’s helping to educate others about crypto. Cowerks has started a networking group to talk about cryptocurrencies.
Will cryptocurrency ever move beyond its risky, volatile reputation? Attorney David J. Sorin, office managing partner at McCarter & English in East Brunswick and co-chairman of its venture capital and emerging growth companies practice, said it has already begun.
Cryptocurrencies are becoming “increasingly professionalized,” he said.
“At the beginning, it’s all about the technological innovators,” Sorin said. “Now we’re seeing the development of venture capital funds who are investing in crypto-related technologies.
“We see the development of cryptocurrency hedge funds and private equity funds. Now it’s not just the cowboys and cowgirls in the business, Now you have professional financially disciplined investors who are adding that discipline and professionalism to the marketplace.”
Over time, cryptocurrencies, with their current high risk and reward profile, will become less volatile over time.
But for the foreseeable future, it will continue to be a “highly speculative, high-risk investment. It’s not for everybody,” Sorin said. “You don’t want to invest your kid’s college fund or the resources that you need on a near-term basis. If you are going to invest in this, you need to be prepared to lose your investment.”
There are other things to consider too. Jeff Vandrew Jr., a lawyer and certified public accountant with offices in Red Bank and Toms River, said cryptocurrencies, especially lesser-known varieties, are quite technical. Outside of Bitcoin and Ethereum, “if you do not have the technical expertise to read a white paper on these different cryptocurrencies, you shouldn’t be investing,” he said.
It’s important to remember that scammers are out there. The Bureau of Securities said there are red flags for signs of investment fraud. Those include:
- Promises of “guaranteed” high investment returns. There is no guarantee that a cryptocurrency will increase in value.
- Unsolicited offers. Cryptocurrency investment opportunities are aggressively promoted on social media. “Be very wary of an unsolicited communication – meaning you didn’t ask for it and don’t know the sender – about an investment opportunity.”
- Sounds too good to be true. Watch out for claims about a project’s future success.
- Pressure to buy immediately. Take time to research before you buy. There’s no need to “act fast” or “get in on the ground floor” of a tech trend.
- Unlicensed sellers. Many investment scams involve unlicensed sellers. You can find out information about a financial professional doing business in New Jersey by calling the Bureau of Securities at 1-866-446-8378 or visiting the bureau’s website at www.njsecurities.gov.
Do you have a consumer problem that needs solving? Contact David P. Willis at 732-643-4042, email@example.com or facebook.com/dpwillis732.