What PFMs Need to Know about Cryptocurrency

By Barbara O’Neill, Ph.D., CFP®, AFC®, boneill@njaes.rutgers.edu

Cryptocurrency Coins
Photo by Worldspectrum from Pexels

Personal Financial Managers (PFMs) get many questions about cryptocurrencies. The Military Families Learning Network personal finance team recently held a free webinar on this topic. Below are ten key take-aways:

Early OriginsCryptocurrencies were preceded by e-money start-ups in the 1990s (e.g., DigiCash). Bitcoin was launched in 2008 with the paper Bitcoin: A Peer-to-Peer Electronic Cash System authored by “Satoshi Nakamoto” (true identity unknown). The paper described Blockchain technology rules for computers to follow.

Bitcoin Value- Bitcoin values are very volatile. They were worth about $3 each in 2011 and almost $50,000 each in early October 2021. The total market value of cryptocurrencies is over $1 trillion. Bitcoins and other cryptocurrencies are sold on specialized exchanges and users store them in an individual digital “wallet.”

Digital Wallets– Digital wallets allow users to spend, receive, and trade cryptocurrencies. There are different types available. Some wallets only support one type of cryptocurrency while others allow users to hold multiple cryptocurrencies.

Blockchain Technology– Cryptocurrencies are decentralized and not run by a government or startup company. Blockchain is a distributed ledger that follows a set of computer rules and stores data. Blockchain enables Bitcoin and other cryptocurrencies to work and can also store other types of important “high stakes” data.

Fraud Reports– From October 2020 to May 2021, almost 7,000 people lost over $80 million to cryptocurrency fraud according to a Federal Trade Commission report. This was more than 10 times the fraud reported a year earlier and a 1,000% increase in losses. Ransomware fraud saw the biggest increase.

Cryptocurrency Users- According to industry reports, almost 14% of Americans own cryptocurrency, mostly those aged 25 to 44 and primarily males (74%). Over two-thirds (69%) view it as a buy-and-hold investment. Interest is growing and 20% of non-owners say they are likely to buy some cryptocurrency in the next year.

Clueless Investors– Research indicates that nearly 35% of current cryptocurrency owners have little to no understanding of how cryptocurrency works. For example, it is immutable. This means that transactions cannot be reversed. A common trigger for cryptocurrency purchases is FOMO (fear of missing out).

Blended Regulation– Cryptocurrencies are commodities, securities, and derivatives. Thus, there is a blended regulatory framework that includes the Commodity Futures Trading Commission, Securities and Exchange Commission, Federal Reserve, Office of the Comptroller of the Currency, and Internal Revenue Service.

Social Scams- Many cryptocurrency scams begin on social media platforms that enable fraudsters to use fake profiles and connect 1:1 with potential fraud targets. Recently, dating sites have been used to find victims. Fraudsters then quickly move their conversation with victims to messaging apps.

Warning Signs- “Red flags” of cryptocurrency fraud include: claims to be a “cryptocurrency advisor,” inability to withdraw money, not displaying or disclosing a company address, promises of earning a lot of money quickly, and requests to pay for cryptocurrency with wire transfers or gift card codes.

To learn more about cryptocurrency and related scams, review the publication What to Know About Cryptocurrency and Scams from the Federal Trade Commission.