Exchange traded fund investors might soon be able to tap into the bitcoin digital currency, but potential investors should consider the risks that are unique to this segment of the market.
Bitcoins are extremely volatile, have not caught on as a mainstream form of currency, and have shown vulnerability to hackers and digital heists, reports Rob Curran for Wall Street Journal.
“The main risk of investing in bitcoin is that it’s a financial instrument unlike any other that we’ve ever had,” Gil Luria, an analyst with the brokerage firm Wedbush Securities, said in the article. “It’s more difficult to value, more difficult to understand, and at this point in time, more difficult to buy and sell than any other financial instrument.”
The Bitcoin is a type of decentralized digital currency based on a peer-to-peer network and can be exchanged through computers internationally without a financial intermediary. The system was first introduced by developer Satoshi Nakamoto in 2009.
The cryptocurrency has experienced high volatility over recent years, with the price of a single Bitcoin rising to over $1,100 from $10 in just a few months, and now trades around $475.
The average fund investor should think of bitcoin as a “highly speculative investment, which means that it has a very high potential reward as well as a very high potential risk,” Luria added.
Bitcoins have not caught on as a mainstream means of purchasing goods. However, the SEC acknowledged Bitcoins can be considered currencies and therefore would fall under that agency’s regulatory purview.