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Informational Resources in Light of Bitcoin Euphoria

6 years ago

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As the euphoria for Bitcoin and other digital cryptocurrencies continues to buzz, we at Cabana know that many have more questions than answers, and wanted to provide our clients with some helpful information and resources pertaining to digital cryptocurrencies. After all, the principals of Cabana are attorneys and we thought it only appropriate to compile some of the regulatory warnings that have been issued.

The information in this blog is for educational purposes only. Cabana does not make any recommendation as to whether investing in digital cryptocurrency is or isn’t appropriate and urges caution for those who do decide to partake in the digital cryptocurrency euphoria. Namely, because we believe it’s just too early to foretell how the legal, financial, consumer, and technological framework will unfold. There exists massive uncertainty at this time. Perhaps in a few years, digital cryptocurrency will be an established asset class and medium of exchange, much like other currencies, and perhaps not. As in many markets, there will be winners and losers. For those who are pondering an investment in or the use of Bitcoin and other cryptocurrencies, we recommend that you take heed of the following considerations before doing so.

  • Trading digital currency is highly speculative. Speculative trading in digital currency carries significant risk. There is also the risk of fraud related to companies claiming to offer digital currency payment platforms and other digital currency related products and services. Bitcoin and other digital currencies can be traded for traditional currency at exchange rates that fluctuate and may be subject to other transaction costs, which are unpredictable.
  • Not insured.While securities accounts at U.S. brokerage firms are often insured by the Securities Investor Protection Corporation (SIPC) and bank accounts at U.S. banks are often insured by the Federal Deposit Insurance Corporation (FDIC), Bitcoins and other digital currencies held in a digital wallet or Bitcoin exchange currently do not have similar protections.
  • History of extreme volatility.The exchange rate (price) historically has been extremely volatile and could drastically decline. For example, the exchange rate of Bitcoin has dropped more than 50 percent in a single day. Bitcoin-related investments may be affected by such volatility. Speculators have been drawn to Bitcoin trading as a way to make a quick profit. But like any speculative investment, from real estate to gold, you can lose money. With digital currency, profits or losses are virtually impossible to predict.
  • Government regulation.Bitcoins and other digital currencies are not legal tender. Federal, state or foreign governments may restrict the use and exchange of digital currencies. Furthermore, mining activities could be outlawed, regulated, or subject to taxes, or restricted by Federal, State, and local governments.
  • Security concerns.Digital currency exchanges may stop operating or permanently shut down due to fraud, technical glitches, hackers or malware. It also may be stolen by hackers. For instance, a Bitcoin exchange in Japan called Mt. Gox failed after hackers apparently stole Bitcoins worth hundreds of millions of dollars from the exchange. Mt. Gox subsequently filed for bankruptcy. Many Bitcoin users participating on the exchange are left with little recourse. There have been other more recent instances as well. In addition, like the platforms themselves, digital wallets can be hacked. As a result, consumers can—and have—lost money.
  • New and developing. As a recent invention, digital currency does not have an established track record of credibility and trust. These currencies are still evolving.
  • Not legal tender. No law requires companies or individuals to accept digital currency as a form of payment. Instead, digital currency use is limited to businesses and individuals that are willing to accept them. If no one accepts digital currency, it will become worthless. Most states and the federal government do not consider it legal tender.
  • Fraud, theft, and illegal activities. Transactions can be subject to fraud and theft. For example, a fraudster could pose as a digital currency exchange, intermediary or trader in an effort to lure an unsuspecting person to send money, which is then stolen and there may be limited recovery options. Third-party wallet services, payment processors and exchanges that play important roles in the use of digital currencies may be unregulated or operating unlawfully. In part because of the anonymity digital currency offers, it has been used in illegal activity, including drug dealing, money laundering and other forms of illegal commerce. Abuses could impact consumers and speculators.
  • Digital currency payments are irreversible. Once you complete a transaction, it cannot be reversed. Purchases can be refunded, but that depends solely on the willingness of the establishment to do so.
  • Competition. There are over 1,000 cyrptocurrencies, like Ethereum and Zcash, from which to choose, experts say. It’s akin to the dot com bubble and it only seems logical that most of them will fail. There is no guarantee that Bitcoin will remain as the preferred currency.
  • Regulatory Advisory – There is a slew of information from Federal and state agencies regarding digital currency. We’ve included a few as food for thought:

1.Securities and Exchange Commission (SEC)

https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11

2. North American Securities Administration Association (NASAA)

http://www.nasaa.org/30628/nasaa-issue-investor-advisory-virtual-currency/

http://www.nasaa.org/30631/informed-investor-advisory-virtual-currency/

3. Financial Industry Regulatory Authority (FINRA):

http://www.finra.org/investors/bitcoin-basics-9-things-you-should-know-about-digital-currency

http://www.finra.org/newsroom/2014/finra-issues-new-investor-alert-bitcoin-more-bit-risky

http://www.finra.org/investors/alerts/initial-coin-offerings-know-before-you-invest

4. Consumer Financial Protection Bureau (CFPB)

https://www.consumerfinance.gov/about-us/newsroom/cfpb-warns-consumers-about-bitcoin/

We hope you find this information useful. If you have further questions regarding your specific situation, we are always available for a consultation. Finally, we at Cabana would like to wish everyone a wonderful holiday season and a prosperous 2018!

-Daniel Ippolito, CCO

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January 17, 2024

This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. This material may only be distributed in its original format and may not be altered or reproduced without the prior written consent of Cabana. The opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.  

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Morningstar’s Moderate Target Risk index  follows a moderate equity risk preference and is based on well-established asset allocation methodology from Ibbotson Associates, a Morningstar company.  

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The Nasdaq Composite Index is a market-weight capitalization index that covers more than 3,000 stocks listed on the Nasdaq Stock Market. What is the Nasdaq Composite, and What Companies are in It? | Nasdaq