This one may sound like a given, but it is particularly important for traders considering a highly volatile asset like bitcoin. The digital currency is a very new asset relative to many other securities.
While stocks and bonds have been around for some time, the first bitcoins were produced in 2009. At the time of this writing (March 2018), the digital currency has been around for less than a decade, making it rather new compared to more established assets.
There are plenty of cryptocurrency scams out there, too. Many initial coin offerings (ICOs) have been taking place in the digital currency space, and these sales of newly created digital tokens have provoked warnings from prominent market experts such as ether co-founder Vitalik Buterin.
Further, the regulatory environment surrounding digital currencies is very immature, meaning that varying government agencies and other entities have provided disparate guidance. The Commodity Futures Trading Commission (CFTC) in the U.S., for example, declared in 2015 that bitcoin was a commodity like gold or oil. As a result, the CFTC has the authority to regulate the digital currency.
The U.S. Securities and Exchange Commission has also provided guidance on digital currencies, indicating in 2017 that the digital tokens sold through ICOs could in some cases be securities. In the instances where these tokens are securities, they are subject to U.S. federal securities law.
However, the developments involving the CFTC and SEC only speak to U.S. regulations. When examined through a global lens, digital currency regulation can become even more confusing.
Cryptocurrencies were a major topic of discussion at the 2018 G20 event in Argentina, where representatives of major economies reportedly worked toward a consensus that bitcoin—and other digital tokens—are in fact assets.
“Whether you call it crypto assets, crypto tokens—definitely not cryptocurrencies—let that be clear a message as far as I’m concerned,” stated Klaas Knot, who heads De Nederlandsche Bank, the central bank of the Netherlands. “I don’t think any of these cryptos satisfy the three roles money plays in an economy.”
Given these considerations, it is even more important for would-be bitcoin traders to conduct their due diligence before getting involved with the digital currency.
There are many places that investors could start when researching bitcoin. They may benefit from scouring industry terminology, learning terms like HODL (hold on for dear life), FUD (fear, uncertainty and doubt) and shill (a person who promotes coins they own in order to turn a profit).
In addition to determining whether bitcoin is right for them, investors should evaluate how the digital currency fits in with their financial objectives and any existing portfolio they have. Bitcoin traders may also want to familiarise themselves with the broader cryptocurrency ecosystem by learning about the prominent personalities and their unique voices.