7 potential risks of Bitcoin and other virtual currencies

With virtual currencies like Bitcoin gaining in both popularity and controversy, the Minnesota Department of Commerce is warning of potential fraud and high-risk investment schemes that prey on consumers.

What is virtual currency?

The Commerce Department defines virtual currency as “an electronic medium of exchange that, unlike real money, is not issued, controlled or backed by a central government or central bank. These currencies can be bought or sold through virtual currency exchanges, and they can be used to purchase goods or services from businesses that accept them.”

Investors purchase virtual currency with the expectation that it will sell for a higher price in the future. These investments can be extremely risky because virtual currency exchange rates often fluctuate dramatically and unpredictably. The value of a single Bitcoin passed the $1,000 mark in November 2013, but settled down to the $200 range by early 2015. The current Bitcoin exchange is about $407 USD.

What are the risks?

Virtual currency is relatively unregulated, unsecured and susceptible to cyberattacks.

Virtual currency accounts are not protected by the Federal Deposit Insurance Corporation (FDIC), which insures bank and credit union deposits.

Virtual currency is volatile and investments may be unsuitable for most investors.

Many businesses that accept virtual currency are unregulated, increasing the risk of fraud and theft than.

Some virtual currency exchanges have been used for illegal activity such as drug dealing and money laundering. If law enforcement shuts down or restricts the use of an exchange, it will affect other consumers and investors.

Virtual currency is considered by the IRS to be a form of property and must be reported as such on federal taxes.

If you believe you may have been the victim of a scam or fraud, you can contact the Commerce Department’s Consumer Services Center by email at consumer.protection@state.mn.us or by phone at 651-539-1600 or 800-657-3602.