The upcoming Winklevoss Bitcoin ETF has investors eager to profit from the surging Bitcoin price - but an inevitable consequence of the Bitcoin economy's growth is a proliferation of high-risk traps for those investing in Bitcoin.
The rush to raise money for exciting new projects means even well-intentioned folks have gotten themselves - and their investors - into some sticky situations.
Some of these Bitcoin investments are outright fraud - efforts to trick the unsuspecting by offering opportunities that don't exist, or some similar chicanery.
The fact is that while any sort of investment in Bitcoin carries significant risk - it's still very early in the game, after all - some Bitcoin investments have emerged in a gray area best avoided.
Let's take the Safecoin/Mastercoin fiasco.
Back in April, a Scottish company called MaidSafe partnered with Seattle-based Mastercoin to create a novel way to "crowdfund" itself using crypto-currencies.
The idea was to let investors use Bitcoin or Mastercoin - a Bitcoin derivative dependent on Bitcoin's blockchain - to buy MaidSafe's "SafeCoin," a digital token designed to be used with its cloud-based Dropbox service to buy and sell storage space.
The convoluted set-up was intended to raise $8 million in funding for MaidSafe.
But to encourage the use of Mastercoin, the organizers set an exchange rate double its valuation at the time. And announced it publicly.
Predictably, the price of Mastercoin rose immediately as savvy crypto-coin investors sought to buy at the lower price in the hope of doubling their money in the coming exchange for SafeCoins. In less than two weeks, the Mastercoin price shot up from about $30 to nearly $89.
The plan was for only 25% of the SafeCoins to be bought in Mastercoin, with the rest to be in the better-established Bitcoin.
But when the sale opened April 22, orders for SafeCoin in Mastercoin flooded in as investors sought to cash in. Within five hours, a sale that was supposed to last 30 days was halted. Even so, 50% of the orders were in Mastercoin.
And it gets worse...
Investors in other parts of the world who had loaded up on Mastercoin in anticipation of the SafeCoin sale woke up to find they, too, were locked out. And now that the sale was over, the Mastercoin price was crashing to below $40 (it fell to $7 this week but recovered to about $18).
Both Maidsafe and those who had bought Mastercoin to invest in Maidsafe were stuck with a digital currency plunging in price that no one wanted to buy. On top of everything else, Mastercoin became illiquid.
Exactly how much would-be investors lost is unclear, but Maidsafe ended up with only $3 million (mostly from the Bitcoin investments) - far below the hoped-for $8 million.
The lesson here is that a Bitcoin boom in value from fractions of a penny to hundreds of dollars (and, someday, perhaps thousands of dollars or more) probably won't be repeated by any of the other hundred-odd crypto-currencies out there.
"They're trying to hit another bubble," economist Daniel Krawisz told Forbes. "They regret not buying Bitcoin when they could have. So they want to replay it. It's like replaying a childhood trauma to overcome it but you just make it worse."
And that's just one example...
Other Dicey Bitcoin Investments to Watch For
Even some Bitcoin investments that worked out well for the investors have had problems.
Just this week, the U.S. Securities and Exchange Commission (SEC) shut down two Bitcoin investing ventures run by Erik T. Voorhees, the casino website SatoshiDICE and FeedZeBirds, which sold ads that site visitors got paid in Bitcoin for re-tweeting.
According to the SEC, Voorhees "published prospectuses on the Internet and actively solicited investors to buy shares" in the offerings. But he failed to register these investments with the SEC, a big no-no.
The SEC forced Voorhees to disgorge his $15,843.98 in profits and pay a $35,000 penalty on top of that.
As for the investors, they got their Bitcoin back in July 2013, when Voorhees sold SatoshiDICE. While they got back 10% fewer bitcoins, those that were returned represented a gain of more than 400% due to the rise in the Bitcoin price.
We're even seeing questionable Bitcoin investments at the state level. Earlier this week the Missouri Secretary of State, Jason Kander, shut down an operation that was soliciting investors in a Bitcoin mining project.
"The fact that somebody is selling investments through Bitcoin rather than traditional currency doesn't change their obligations to investors, and I encourage Missourians to call my office before making any Bitcoin investments," Kander said. "Investors have a right to know the full set of facts about both an investment and its backer, including the risks, profit-generating strategy and pertinent financial history."
The Right Way to Invest in Bitcoin
We're bound to see more of these wild, seat-of-the-pants Bitcoin investments, but there are better ways to invest in Bitcoin.
That said, the first thing to keep in mind about investing in Bitcoin is that you should only risk what you can afford to lose.
Perhaps the best way to invest in Bitcoin will be via Bitcoin funds approved by regulators. Both SecondMarket's Bitcoin Investment Trust as well as the Winklevoss Bitcoin Trust, a Bitcoin ETF created by the Winklevoss twins, Cameron and Tyler, are expected to get that approval later this year.
The Bitcoin Investment Trust is set up as a hedge fund that will be open to retail investors, while the Winklevoss Bitcoin ETF will trade on the Nasdaq like any other exchange-traded fund.
Simply buying Bitcoin itself as an investment is also a good option.
It's getting easier to buy bitcoins every day, as more Bitcoin ATMs spring up around the world, and vehicles for buying Bitcoin, such as CoinBase, become available.
Have you considered making a Bitcoin investment? Why or why not? Share your opinions on Twitter @moneymorning or Facebook.
In the wake of the Mt. Gox bankruptcy, many investors are wary of making a direct investment in Bitcoin. And it's true that some options are better than others. That's why we put together this Money Morning guide on how to buy Bitcoin...
Related Articles:
- Forbes: The First 'Bitcoin 2.0' Crowd Sale Was a Wildly Successful $7 Million Disaster
- SEC: SEC Charges Bitcoin Entrepreneur with Offering Unregistered Securities
- OzarksFirst.com: Springfield Bitcoin Investment Plan Stopped by State of MO
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.