Beware Bitcoin, warns Washington state financial regulator

Watch out: Bitcoin is volatile, unregulated and you could lose it all!

Yes, this warning might seem obvious to anyone savvy enough about the virtual currency to consider putting any money into it. But Bitcoin is in the headlines every day, getting its own ATMs, and is even now being accepted for in-game purchases.

And just in case anyone out there was thinking about sinking their life savings into Bitcoin, the Washington State Department of Financial Institutions today issued a consumer alert that warns, in essence, ‘Don’t be stupid!’

The alert is notable not as much for its content as for the fact that it was issued — more evidence that the virtual currency has entered the mainstream. Here’s the alert, in its entirety … just in case you needed the warning.

The Risks of Buying, Investing in and Trading Virtual Currencies
March 11, 2014

As the Congress, and state and federal regulatory bodies, determine whether to or how best to oversee the virtual currency market, it would be wise for consumers to consider the risks of holding virtual currencies for investment or as a currency. Before buying, investing in or trading virtual currencies you should consider the following:

1. Volatility. One of the major risks of holding virtual currencies is their volatility. Their value can rise or fall substantially over a short period of time. Bitcoin, the most well-known virtual currency in the market, traded for $13 in January 2013, $100 in July 2013, over $1,100 in December of 2013 and is now valued at $660 as of March 2013. Bitcoins, and others like it, are basically lines of computer code that are valued by the marketplace with no governmental support or oversight. Anyone holding virtual currencies should understand that they could lose a significant part of their investment as the market changes. Don’t invest more than you afford to lose.
2. No Deposit Guarantee. There are no deposit guarantees like FDIC insurance to protect customer funds held by virtual currency exchanges. Once the funds are gone, there is no way to retrieve them and no way to make the consumer whole.
3. Lack of Protection for digital wallets. Some exchange companies that offer to store the consumer’s virtual currencies in virtual wallets have been unable to protect them. There are a number of instances where consumers have lost all their funds because their wallets have been hacked.
4. Connection to criminal activity. Because virtual currencies provide some anonymity, criminal elements have found them useful for money laundering and other crimes. When exchanges are shut down as a result of either knowingly or unknowingly facilitating a crime, customers may have difficulty accessing their funds.
5. Tax implications. The Internal Revenue Service has not opined on the tax implications of virtual currencies. The benefits of using virtual currencies may be outweighed when the IRS determines the tax repercussion.

There are many institutional protections for the vast amount of financial services offered to consumers in the United States and many European countries. For the time being, the best advice when using virtual currencies is “Caveat Emptor” or Let the Buyer Beware.