By W. Dowdy White, Spring 2018 IAC Student Intern
If you were going to walk across a balance beam one hundred feet in the air, would you prefer for that beam to be made out of either steel or a toothpick? The answer to that question is easy – everyone would pick steel. If you were investing all of your money with the risk of losing it all, would you prefer to invest in a fund that promises huge returns at a high risk or would you rather invest in a fund that promises small returns at a low risk? The answer to that question is bit more difficult to answer.
Cryptocurrencies are currently the latest fad in investing. Specifically, consumers flock to these investments by the boatload because these funds promise exponentially high returns. However, according to a recent investor alert from the Financial Industry Regulatory Authority (FINRA) in December 2017, cryptocurrencies may not be the slam-dunk investment that everyone makes them out to be. In fact, FINRA warns potential investors not to be fooled by “unrealistic predictions of returns and claims made through press releases, spam emails, or posted online . . .” at the risk of their money vanishing into thin air.
There have been many cryptocurrency-related stock scams over the past several years. In fact, the Securities and Exchange Commission (SEC) suspended trading in a large number of securities because of some questions about the accuracy of some cryptocurrency-related activities. Specifically, the SEC questioned the accuracy of claims ranging from the value of the assets of the now-defunct company, DIBCOINS, to statements by several companies who planned to conduct Initial Coin Offerings (ICO).
Because of the very prominent success of companies like Bitcoin, the cryptocurrency marketplace is emphatically booming. With more cryptocurrencies appearing on the market on a regular basis, it is easy for company promoters to make outrageous claims about their product without the research and facts to back them up. To assist consumers in avoiding these situations, FINRA released six tips to avoid costly mistakes in cryptocurrency investing.
- Be suspect of anyone who makes guarantees that an investment will perform a certain way. Specifically, don’t trust any pushy sales pitch that requires you to act at that exact moment.
- Do not say “yes” to cryptocurrency stock purchases from an aggressive telemarketer. Aggressive salespeople will try to make their claims sounds plausible and rock-solid. FINRA recommends not answering the phone or hanging up on an aggressive salesperson as the safest responses in this situation.
- Always perform a FINRA Broker Check to investigate the people who push these investment opportunities to you. If you find that a broker has multiple claims against him for fraud or other securities issues, it’s probably best to just walk away or not to talk to him at all.
- To find out whether or not the company files with the SEC, check the SEC’s EDGAR database. If the company does in fact file with the SEC, you will be able to read the company’s reports in order to perform your own investigation. You can also use these reports to verify information you were told about the company.
- Be suspect of stocks or funds with a swift and excessively large spike in price. The SEC warns that this is often a tell-tale sign of customer manipulation or fraud.
- Pay close attention to any cautions or warnings associated with the stock or fund. Often times, according to the SEC, most manipulative stock schemes are quoted on an “over-the-counter” quotation platform, which displays icons to caution potential investors of concerns associated with a company. If a signal looks troubling, it probably is. Specifically, a signal displaying a stop sign indicates that “the company cannot or will not provide important information to regulators” and a signal displaying a skull and crossbones indicates that “the person who controls the company might be involved” in questionable marketing or other actions.
Cryptocurrencies appear to be here for the long haul, according to the SEC. With that being said, it is extremely important for you to protect yourself and your money from potentially fraudulent investments. To keep it simple, if it sounds too good to be true, it probably is. If a salesperson tells you that he can guarantee you a 300 percent return on your investment if you act “right now,” he’s probably streamlining your money right into his own bank account. However, if you follow these tips from FINRA and the SEC, you should be good to go. As I previously mentioned, cryptocurrencies are trendy investments right now, so I don’t blame you for wanting to get in on the fun. Just remember to be careful and trust your instincts!
If you would like to learn more about FINRA’s Investor Alert, cryptocurrencies, or about protecting yourself while investing, please check out the links below: