April 5, 2021

Cryptocurrency: A Cautionary Tale

Cryptocurrency, Blockchain, Initial Coin Offerings (ICOs), and tokens are hot buzzwords in the financial media world lately, and I get A LOT of questions about them. That said, I wanted to provide some easy-to-understand information and a few words of caution on this big trend.

First and foremost, investors should understand that to date, no initial coin offerings have been registered or approved for listing and trading with the Securities and Exchange Commission (SEC).

But Shane, what does the SEC have to do with this? What’s wrong with hopping online and buying some bitcoin?

Well, folks, it’s the SEC’s job to protect investors and maintain fair, orderly, and efficient markets. If someone is trying to tell you cryptocurrency (Bitcoin, Ripple, Ethereum, etc.) is approved by the SEC, be especially wary.

Let’s take a look at what we’re dealing with, so you can have an informed opinion on this trend:

What is cryptocurrency?
Cryptocurrency is digital money that allows secure and seamless peer-to-peer transactions on the internet.

Is bitcoin cryptocurrency?
Yes, bitcoin is the first widely adopted cryptocurrency and just another way of saying digital money.

How does cryptocurrency work?
Unlike services like Venmo and PayPal, which rely on the traditional financial system for permission to transfer money and on existing debit/credit accounts, bitcoin is decentralized. This means that any two people anywhere in the world can send bitcoin to each other without the involvement of a bank, government, or other institution.

What is Blockchain?
Every transaction involving cryptocurrency is tracked on the Blockchain, like a bank’s ledger or log of customers’ funds going in and out of the bank. Unlike a bank’s ledger, the Blockchain is distributed across the entire network. No company, country, or third party controls it, and anyone can become part of that network.

Why is cryptocurrency considered risky?
As cryptocurrency networks do not rely on governmental authorities or financial institutions to create, transmit or determine the value of digital currencies, users may acquire and trade digital currencies without the involvement of intermediaries. Concerns have been raised regarding the cryptocurrency and ICO markets, including the fact that there is substantially less investor protection than our traditional securities markets. Less investor protection (no SEC oversight, remember?) means greater opportunities for fraud and manipulation.

What is Strong Gaddy Lee’s policy concerning cryptocurrency?
Our broker dealer, LPL Financial, does not allow for the solicitation and/or purchase of actual cryptocurrency investments, cryptocurrencies and block chain technologies.

I want to try using cryptocurrency on my own. What do I need to know?
Investing or trading cryptocurrencies independently requires technical skill and basic knowledge of how Blockchain works. Before diving in, consider these factors:

• Who exactly am I contracting with?
• Where is my money going and what will it be used for? Is my money going to be used to “cash out” others?
• What specific rights come with my investment?
• Are there financial statements? If so, are they audited, and by whom?
• Is there trading data? If so, is there some way to verify it?
• How, when, and at what cost can I sell my investment? For example, do I have a right to give the token or coin back to the company or to receive a refund? Can I resell the coin or token, and if so, are there any limitations on my ability to resell?
• If a digital wallet is involved, what happens if I lose the key? Will I still have access to my investment?
• If a Blockchain is used, is it open and public? Has the code been published, and has there been an independent cybersecurity audit?
• Has the offering been structured to comply with securities laws? If not, what implications will that have for the stability of the enterprise and the value of my investment?
• What legal protections may or may not be available in the event of fraud, a hack, malware, or a downturn in business prospects? Who will be responsible for refunding my investment if something goes wrong?
• If I have legal rights, can I effectively enforce them, and will there be adequate funds to compensate me if my rights are violated?

As with any potential investment, if a promoter guarantees returns, if an opportunity sounds too good to be true, or if you are pressured to act quickly, please exercise extreme caution and be aware of the risk that your investment may be lost.

As always, I am here to answer your questions – be in touch if there’s anything this article didn’t help clarify.

Content in this material is for general information only is not intended to be a substitute for individualized financial advice. Please consult your legal advisor regarding your specific situation.
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