With interest in virtual currencies growing, you would have come across questions from your prospects and clients related the risks of buying into virtual currency. If you struggled to answer the question, here's some useful information.
As shared by MoneySENSE, the national financial education programme in Singapore:
What risks should you look out for in relation to virtual currencies?
As interest in virtual currencies grows, please be aware of the risks involved if you are buying a virtual currency.
Virtual currencies have seen extreme price volatility. Transparency has been limited as there might be little publicly available information that could help you gauge the fair value of the virtual currency. The surges in the prices of virtual currencies appear to be driven by speculation. If you plan to buy virtual currencies, you should carefully consider the claims being made about you are being offered – if the touted ease of making significant profits sounds too good to be true, it probably is. You should carefully assess whether buying virtual currencies is suitable for your investment objectives and risk appetite. Buyers of virtual currencies should be aware that they run the risk of losing all their capital.
The platforms or persons you deal with may not have taken enough security precautions and this could lead to theft through hacking. For example, as in the case of Bitcoin exchange Mt. Gox, which had 850,000 Bitcoins stolen in February 2014 (valued at more than US$450 million at the time), leading to its subsequent bankruptcy and closure. In January 2018, Coincheck, another virtual currency exchange based in Japan, also reported being hacked into and losing an estimated USD 400 million to theft.
Fraud has also occurred in relation to companies that claim to offer virtual currency payment platforms and other virtual currency related products and services. For example, in December 2015, the US Securities and Exchange Commission charged two Bitcoin mining companies with conducting a Ponzi scheme.
The anonymity of transactions involving virtual currencies means they can be an attractive means for money laundering and other illegal activities. In the event a platform or person is discovered to have used virtual currencies for purposes of money laundering or other illegal activities, it is likely that you could find your activities adversely affected if a law enforcement agency limits or even shuts down the platform’s or person’s operations.
You could lose your digital wallet or it could be hacked into and the contents stolen.
MoneySENSE is spearheaded by the Financial Education Steering Committee (FESC). The Monetary Authority of Singapore (MAS) chairs the FESC, which comprises representatives from several public sector agencies and government ministries.
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