At the start of 2018 I cautioned readers about investing in cryptocurrencies in my article titled “Investing in Bitcoin and Other Cryptocurrencies.” Since the beginning of the year, Bitcoin has shed more than 50% of its value and is down more than 65% from it’s high on December 11, 2017. Ethereum, the second largest cryptocurrency by market cap, reached a record high of $1,422 on January 13, 2018 but has also declined more than 65% to $453 as of the end of Q2 2018. Yet, despite all the rational reasons for investing your hard-earned dollars in SEC regulated investments, people are still talking about buying Bitcoin.
At the end of September 2017, Fortune published a great article titled “Cryptocurrency Exchanges Are Increasingly Roiled by Hackings and Chaos.” At the time the article was published, the author stated that more than 980,000 bitcoins had been stolen, as a result of “at least three dozen heists of cryptocurrency exchanges since 2011.” But that was at the end of the 3rd quarter of 2017.
It seems that we are learning of a new crypto exchange hack all too often now. Last week, Israel-based crypto exchange, Bancor, was hacked and lost about $23.5 million of cryptocurrency tokens belonging to its customers. A couple of weeks ago, a South Korea-based exchange called Bithumb reported that about $30 million in cryptocurrency was stolen. And before that it was Coinrail who lost more than $40 million. But all of that pails in comparison to the $500 million hack at Japan cryptocurrency exchange Coincheck at the beginning of this year.
Assets held at crypto exchanges, such as those mentioned above, are not FDIC insured. They are insured by the faith and ability of the exchange to repay the loses. Some exchanges are attempting to compensate burned investors. Full repayment however, is highly unlikely.
Another thing to consider before investing in a cryptocurrency is, what happens to your digital investment if you pass away while owning it. Since it is a digital currency, it is stored in a digital wallet. Each digital wallet has a separate “private key” that enables the owner to access and manage it. If the owner dies and no one knows the key to access it, the heirs won’t be able to access the cryptocurrency. Jeff John Roberts addresses this concern in his Fortune article “What Happens to Cryptocurrency When You Die?”
Cryptocurrency is certainly an interesting concept that gets a lot of attention in the media and around the watercooler. Several prominent investors have weighed in on the discussion and voiced their opinions as to whether or not cryptocurrency should be viewed as a currency or a commodity, or even an investment. Most have described it as just a bet, and advise that you stay far far away from it. If you do feel compelled to dip your feet into these murky waters, you should really do your research and consider the “what if’s” that can take place.
Kevin Warman, CIMA®
Last Updated (7.13.2018)