Uncovering the mysteries of cryptocurrency: what is it and should you use it?

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Cryptocurrencies have been one of the hottest subjects in the financial world during the last month.

Once relegated to the recesses of the dark web and criminal underworld, cryptocurrencies like Bitcoin have made primetime news with their sudden meteoric rise in values.

“Right now, it’s a digital version of the gold rush,” said Ben Carlston, PhD, Assistant Professor of Finance at the Eberhardt School of Business at the University of the Pacific.

Cryptocurrencies like Bitcoin, Litecoin, Peercoin and Ripple to name a few are currently more like volatile commodities than actual currencies.

Unlike traditional monies, cryptocurrencies have no nation or standard determining what it is worth. The value of the currency is entirely determined by the demand for that particular currency. This leads to wild fluctuations in values.

One day a Bitcoin may be worth $20,000, two days later it may be worth $9,000.
“I think any investor should be well aware of the risks involved,” Carlston said.

Those risks include the sketchy nature of the currency. They can’t be bought through most traditional investment companies. Traditional hedge funds have shied away from them so far. Most companies that buy and sell the currencies are private companies and LLCs with little to no public information available about them.

The currencies aren’t traded on any traditionally regulated exchange. The digital exchanges that do trade them come with names like Coinbank, Coinmama and Kraken. A person must create an account on the exchange to buy the currency they want.

While the currency can be used to buy an item if a seller can be found willing to accept that currency, most investors must rely on selling the currency on the exchange in order to turn it into traditional cash that can be used to buy items.

The currency trading platforms have had a history of problems as well. Several have had high-profile crashes, locking investors out of their accounts. That can make reaping those large gains impossible.

The anonymity of the currencies can make proving ownership impossible if the storage device containing the currency gets stolen or hacked.

Investment houses like Charles Schwab, UBS and hedge funds have largely avoided the currencies due to their lack of regulation and history of use for criminal purposes.

Stifel Nicolaus, an investment company based in St. Louis, has been one of the first to come out with an official position against trading the currencies.

“Management is not comfortable with these virtual currency securities, that we should not allow any purchases in retail or advisory, including [third-party manager] platforms,” according to a statement from Stifel Nicolaus’ compliance office. “We do not know if/when this will be revisited any time soon due to the lack of government control, Ponzi schemes, fraud, money laundering concerns and criminal activity hovering around these investment types.”

Currently, advisors at the company can’t buy or sell the currencies for their clients even if they wanted to.

“I am glad it is harder to invest,” Carlston said. “A lot of investors don’t see the risks. Personally, I am a skeptic about the future of cryptocurrencies.”

Not everyone believes the currencies will remain volatile commodities or ways to pay off criminal endeavors. Some experts think that the currencies could have a mainstream future.

“It is a possibility that it could become mainstream,” said Gokce Soydemir, Foster Farms Endowed chair of Business and economics at CSU-Stanislaus. “There are several hurdles to overcome.”

The sheer number of currencies is one problem. Some of the currencies make no claims about their intrinsic value. One such currency is named Useless Ethereum Token. The logo on the website is a middle finger, and the site states that what the buyer is getting is worthless.

Still investors have bought onto the tokens which now have actual value, at least for the moment.

Soydemir compares the current environment to the early financial system of the United States where banks and states would mint their own coins and print their own dollars. That became unsustainable, and, in 1913, the U.S. Federal reserve system was born to regulate the country’s money supply.

“The question is if you have several currencies, why don’t you have one,” Soydemir said.
There is also the possibility that the currencies could become unusable. Reports in mid-January that Asian nations were looking at banning the digital monies sent values sliding 30 percent in one day.

Some Bitcoin investors trying to spend their gains from digital money in real estate were turned away by mortgage companies in England. The banks feared that without a clear source of where and who the money came from, the proceeds could be the result of money laundering.

Regardless of the future of the cryptocurrencies, those who currently have the digital currencies laying on a hard drive should consider taking their profits.
“If you bought it several years ago, I would sell,” Soydemir said.

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