Why Investing in Digital Currencies Like Bitcoin Is So Dangerous

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.

But ICOs, are far riskier than stock IPOs—and have other key differences.

For one thing, in an IPO, the average investor can’t easily participate, says Christina Tetreault, staff attorney for Consumers Union, the policy and mobilization division of Consumer Reports. Companies going public award their shares to institutional investors, which may then make them available to their customers as long as their income meets certain thresholds. In this way, average investors can’t take undue risks that could wipe them out. 

That’s not so with ICOs—anyone can participate. The result is that some overeager investors may take on too much financial risk, says Tetreault. 

Another difference: ICOs don’t have to live up to the same high standards as IPOs. Before a company can file to go public it has to show a minimum earnings level, undergo audits, issue a prospectus that explains the company’s financials, etc. In other words, by the time shares are offered to the public there has been some due diligence, the shares are considered viable, and investors have access to information.

No such safeguards exist for ICOs. Cryptocurrency issuers may not even have a track record investors can examine to see if the company is financially sound. While many do publish a white paper explaining why they are raising funds, there is no legal requirement that they do so.

In December, SEC chairman John Clayton 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.

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