The European Supervisory Authorities (ESAs) have issued a press release alerting consumers to the risks associated with buying cryptocurrency. The release follows previous statements issued that warned investors of the risks associated with participating in ICOs and trading digital assets.
Lack of Regulation and a ‘Pricing Bubble’
Just yesterday, the ESAs issued a statement to consumers, warning them of the risks associated with cryptocurrency due to their non-regulated status. Their main concern for investors deals with the potential for a cryptocurrency exchange to be hacked or shut down, and the inability for the government to cover the associated losses.
For example, if a VC exchange goes out of business or consumers have their money stolen because their VC account is subject to a cyber-attack; there is no EU law that would cover their losses.
Another concern posited by the release is the ‘clear sign’ of cryptocurrency being in a pricing bubble. The release was most likely influenced by the recent price correction initiated in mid-December during the media frenzy and on-ramping of plenty of retail investors. After hitting a low of slightly under $6,500, Bitcoin has since recovered to the mid $8000s range and is still up over 700% in relation to its price at this exact time last year.
Unsuitability for Long-Term Investment?
One of the main featured arguments in the release against buying cryptocurrencies deals with their “unsuitability” when it comes to both short-term and long-term investment.
The high volatility of VCs, the uncertainty about their future and the unreliability of the VC exchange platforms and wallet providers makes VCs unsuitable for most consumers, including those with a short-term investment horizon, and especially those pursuing long-term goals like saving for retirement.
However, investing in most high-performing cryptocurrency assets, including Bitcoin, Ethereum, and Litecoin, has proven to be quite lucrative in both the short-term and long-term, with massive increases across the board over the years.
Also mentioned is the “unreliability” of cryptocurrency exchange platforms and wallets. Though true in some instances, considering the recent BitGrail exchange failure and Coincheck exchange hack, recommended practices typically include storing cryptocurrency on wallets to which each individual controls his or her own private keys, and opting for hardware wallets for an added security layer.
Proper education on both storage practices and due diligence might prove to be the greatest panacea to the hysteria and warnings.
Not Their First Rodeo
This wouldn’t be the first time that the European authorities have warned investors about the risks of investing in cryptocurrencies. After vastly outpacing traditional venture capital funding in 2017, Initial Coin Offerings (ICOs) became a hot media topic and plenty of investors were keen on taking the plunge.
Back in November, the European Securities and Marketing Authority (ESMA) issued a statement in regard to the growth and instability associated with ICOs, warning investors that ICOs are “extremely risky,” and that they could be vulnerable to both fraud and illicit activities.
ICOs are highly speculative investments. ICOs, depending on how they are structured, may fall outside of the regulated space, in which case investors do not benefit from the protection that comes with regulated investments.
Although their tone was generally in favor of ICOs being considered an innovative way to raise capital, ESMA still acknowledged that protections aren’t present due to the absence of regulation in the space. Just like participating on virtual currency exchanges, the government can’t step in to protect individuals if they lose money in the case of illiquid markets or extreme volatility.
What are your thoughts on the warnings issued by the ESAs? Do you think that this is possibly foreshadowing increased cryptocurrency regulation in Europe? Let us know in the comments below.
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