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Consumer Reports: 4 Reasons Why Digital-Currency Investing Is Dangerous

Consumer Reports: 4 Reasons Why Digital-Currency Investing Is Dangerous
(Dmitry Volochek/Dreamstime)

By    |   Wednesday, 17 January 2018 12:44 PM

By now, everyone has heard about the mania over cryptocurrencies — a form of encrypted digital money that average investors can trade just like stocks.

The frenzy was sparked by Bitcoin, the oldest and most well-known cryptocurrency, which soared more than 1,900 percent in 2017 to around $20,000, before falling to around $14,000 this month.

There are now hundreds of other such currencies that can be traded — and new ones are regularly being created. Eastman Kodak, for example, just announced Kodakcoin, a cryptocurrency for photographers to use to manage rights and fees for their work.

The company's shares rose 245 percent on the news.

But don't be fooled, Consumer Reports warns.

“People are desperate for anything that can bring them instant wealth, but [cryptocurrencies] are very risky investments because the technology is new and unproven,” says Jerry Brito, executive director of CoinCenter, a D.C.-based nonprofit research and advocacy group focused on the public policy issues facing the cryptocurrency.

“You shouldn’t invest in stuff you don’t understand and you shouldn’t be investing money that you can’t afford to lose,” he says.

If that isn't enough to deter you, Consumer Reports offered four other reasons:

Fraud and Security Issues

The most popular way to buy and sell cryptocurrencies is through an exchange, where buyers and sellers come together online to trade. But regulators, including the Consumer Finance Protection Bureau and the Securities and Exchange Commission, which since July has become much more active in cryptocurrency oversight, have been warning that some exchanges are fake. Unsuspecting investors can easily open an account at a fraudulent exchange and submit money to buy, say, Bitcoin. But the criminals steal the money and the investor never receives the Bitcoin.

Initial Offerings Provide Few Protections

For some investors, one attraction of cryptocurrencies is the ability to participate in an initial coin offering, or ICO. Investors jump in, hoping to get the digital currency at a low price and then profit as it rises. SEC chairman John Clayton has warned investors that the regulator may not be able to effectively pursue bad actors or recover funds for investors, partly because these markets often operate outside of the United States.

There Will Be Fees

It's true that when Bitcoin was created, the idea was partly to create a bank alternative as a way to avoid high fees. But trading cryptocurrencies will still cost you, usually a fraction of a percent of the total transaction amount, depending on the exchange. A year ago, before most people were thinking about trading Bitcoin, a wallet transaction fee averaged around six cents, according to Bitinfocharts, a fee tracker. That fee rose to around $55 per transaction, when the number of transactions reached their height in late December.

Cryptocurrencies Are Easy to Lose

When you buy a cryptocurrency and place it in your smartphone's cryptocurrency wallet, it might be safer than taking the alternative route, which is to store it in a wallet located at an exchange. That's because exchanges are more likely to be hacked than your smartphone. To date, billions of dollars worth of Bitcoin and other cryptocurrencies have been lost on exchanges to hackers.

For its part, Bitcoin skidded below $10,000 on Wednesday, halving in value from its peak price, with investors gripped by fears regulators could clamp down on the volatile cryptocurrency that sky-rocketed last year, Reuters explained.

The price of bitcoin, the world’s biggest and best known cryptocurrency, fell to as low as $9,500 on the Luxembourg-based Bitstamp exchange, the lowest since Dec. 1.

Bitcoin had touched a peak of almost $20,000 in December - and indeed crossed over that threshold on some exchanges - but has since been roiled by several large selloffs.

Other cryptocurrencies plunged as well. Ethereum and Ripple were both down heavily after reports South Korea and China could ban cryptocurrency trading, sparking worries of a wider regulatory crackdown.

“There is a lot of panic in the market. People are selling to try and get the hell out of there,” said Charles Hayter, founder of Cryptocompare, which owns cryptocurrencies.

“You have more regulatory uncertainty ... and because of these falls, you have these other fallouts,” he said, referring to the collapse of some cryptocurrencies in the recent slump in prices.

Analysts at Citi said on Wednesday bitcoin could halve again in value amid the current rout, adding that a possible fall to between the $5,605 and $5,673 area “looks very likely to be very speedy.”

(Newsmax wire services contributed to this report).

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Price volatility is just one of many risks in this hyped-up market
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2018-44-17
Wednesday, 17 January 2018 12:44 PM
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