Customer Advisory: Understand the Risks of Virtual Currency Trading

The U.S. Commodity Futures Trading Commission (CFTC) is issuing this customer advisory toinform the public of possible risks associated with investing or speculating in virtual currencies
or recently launched Bitcoin futures and options.
Virtual currency is a digital representation of value thatfunctions as a medium of exchange, a unit of account, or astore of value, but it does not have legal tender status.
Virtual currencies are sometimes exchanged for U.S.
dollars or other currencies around the world, but they are
not currently backed nor supported by any government orcentral bank. Their value is completely derived by market
forces of supply and demand, and they are more volatile
than traditional fiat currencies. Profits and losses related tothis volatility are amplified in margined futures contracts.
For hedgers – those who own Bitcoin or other virtual
currencies and who are looking to protect themselves
against potential losses or looking to buy virtual currencies
at some point in the future – futures contracts and options
are intended to provide protection against this volatility.
However, like all futures products, speculating in thesemarkets should be considered a high-risk transaction.

Bitcoin is a Commodity
Bitcoin and other virtual currencies
have
been
determined
tobe
commodities under the Commodity
ExchangeAct(CEA).
The
Commission
primarilyregulates
commodity derivatives contracts thatare based on underlying commodities.
While its regulatory oversight authority
over commodity cash markets islimited, the CFTC maintains generalanti-fraudandmanipulation
enforcement authority over virtual
currency cash markets as a commodityininterstate
commerce.

What makes virtual currency risky?
Purchasing virtual currencies on the cash market – spending dollars to purchase Bitcoin for your personal
wallet, for example – comes with a number of risks, including:
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most cash markets are not regulated or supervised by a government agency;
platforms in the cash market may lack critical system safeguards, including customer protections;volatile cash market price swings or flash crashes;
cash market manipulation;
cyber risks, such as hacking customer wallets; and/or
platforms selling from their own accounts and putting customers at an unfair disadvantage.

It’s also important to note that market changes that affect the cash market price of a virtual currency may
ultimately affect the price of virtual currency futures and options.
When customers purchase a virtual currency-based futures contract, they may not be entitled toreceive the actual virtual currency, depending on the particular contract. Under most futurescontracts currently being offered, customers are buying the right to receive or pay the amount of anunderlying commodity value in dollars at some point in the future. Such futures contracts are said to be“cash settled.” Customers will pay or receive (depending on which side of the contract they have taken –long or short) the dollar equivalent of the virtual currency based on an index or auction price specified in
the contract. Thus, customers should inform themselves as to how the index or auction prices used tosettle the contract are determined.
Entering into futures contracts through leveraged accounts can amplify the risks of trading theproduct. Typically, participants only fund futures contracts at a fraction of the underlying commodity pricewhen using a margin account. This creates “leverage,” and leverage amplifies the underlying risk, making
a change in the cash price even more significant. When prices move in the customers’ favor, leverage
provides them with more profit for a relatively small investment. But, when markets go against customers’
positions, they will be forced to refill their margin accounts or close out their positions, and in the end may
lose more than their initial investments.
Beware of related fraud
Virtual currencies are commonly targeted by hackers and criminals who commit fraud. There is noassurance of recourse if your virtual currency is stolen. Be careful how and where you store your virtualcurrency. The CFTC has received complaints about virtual currency exchange scams, as well as Ponziand “pyramid” schemes.
If you decide to buy virtual currencies or derivatives based on them, remember these tips:
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If someone tries to sell you an investment in options or futures on virtual currencies, including
Bitcoin, verify they are registered with the CFTC. Visit SmartCheck.gov to check registrations orlearn more about common investment frauds.
Remember—much of the virtual currency cash market operates through Internet-based trading
platforms that may be unregulated and unsupervised.
Do not invest in products or strategies you do not understand.
Be sure you understand the risks and how the product can lose money, as well as the likelihoodof loss. Only speculate with money you can afford to lose.
There is no such thing as a guaranteed investment or trading strategy. If someone tells you there
is no risk of losing money, do not invest.
Investors should conduct extensive research into the legitimacy of virtual currency platforms anddigital wallets before providing credit card information, wiring money, or offering sensitive
personal information.
The SEC has also warned that some token sales or initial coin offerings (ICOs) can be used to1
improperly entice investors with promises of high returns.

If you believe you may have been the victim of fraud, or to report suspicious activity, contact us at866.366.2382 or visit CFTC.gov/TipOrComplaint.

1

See https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_coinofferings.

The CFTC has provided this information as a service to investors. It is neither a legal interpretation nor a statement of CFTC policy.
If you have questions concerning the meaning or application of a particular law or rule, consult an attorney.