Call it what you want: Virtual, online or crypto — the recent rise of digital currencies is causing both massive confusion and a stampede of investors all trying to figure it out.
The warning by Mubarak Rashid Khamis Al Mansouri, Governor of the UAE Central Bank, that investors should be wary of Bitcoin due to its volatility, lack of regulation and possible use as a money-laundering tool should be heeded. That warning should also be extend to Ethereum and any other blockchain-based currencies, which are properly called cryptocurrencies. This warning should go double for anyone looking to invest in any Initial Coin Offering (ICO), which have been increasingly appearing on global markets over the past year. This warning doesn’t mean that digital currencies must be avoided, but there are a few facts that anyone looking to invest in them should know.
First, that despite the name, digital currencies are NOT currencies in the legal sense. Few central banks regulate them, they are not easily convertible to cash and no one is under any obligation to accept them. Expecting a retailer to accept your Bitcoin is little different than asking him to take your US Treasury bond certificates as payment.
Second, cryptocurrencies such as Bitcoin and Ethereum are legitimate but volatile investment assets, with all the associated risks. They are volatile, due partly to the asset being only a collection of 1s and 0s, without a physical component. Their sustainability over the long-term has yet to be proven.
Third, cryptocurrencies should not be confused with payment tools such as the e-dirham, which is a government-based system. The UAE government is not currently accepting Bitcoin or any other cryptocurrency for payment.
Fourth, anyone can launch a cryptocurrency, which has led to an increase in ICOs by companies, as they seek additional ways to raise funds. However, due to lack of transparencies with ICOs, this investment is highly speculative. In at least one case that Gulf News has seen, the coin offered for investment could not even be converted to cash, but could only be used to purchase items at an online mall. This issue has caused some to call for digital currencies to be banned. We believe just the opposite. Their use should be encouraged, but with their use needs to come a fuller-understanding of the technology behind them and what roles these currencies will play in a modern, digital market.
For now, investors need to practice caution before more get burned.
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