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SEC Warns 'Extreme Caution' Over Cryptocurrency Investments As Many People Take Out Mortgages To Buy Bitcoin (qz.com)

Posted by msmash on from the here-we-are dept.

The head of the US Securities and Exchange Commission has warned bitcoin and other cryptocurrency investors to beware of scams and criminal activity in the sector. In the financial regulator's strongest statement yet, SEC chair Jay Clayton said: "If a promoter guarantees returns, if an opportunity sounds too good to be true, or if you are pressured to act quickly, please exercise extreme caution and be aware of the risk that your investment may be lost." The warning comes at a time when many people have begun to take out mortgages to buy bitcoin. From a report: Clayton's statement was also issued the same day the SEC took regulatory action to halt an initial coin offering (ICO). "Recognize that these markets span national borders and that significant trading may occur on systems and platforms outside the United States. Your invested funds may quickly travel overseas without your knowledge," he wrote, in a sentence that was in bold. Clayton's statement referenced some of the crucial debates that have swirled around the rise and regulation of crypto-assets like bitcoins. Are these currencies? Commodities? Or securities? The statement notes in a footnote that bitcoin in the US has been designated a commodity. But the broader answer seems to be that while it depends from case to case, initial coin offerings, at least, are more likely to be scrutinized and held to the same bar as securities offerings.

17 of 233 comments (clear)

  1. Now by Anonymous Coward · · Score: 5, Insightful

    Now is when you cash out, if you were wondering...

    1. Re:Now by Anonymous Coward · · Score: 2, Insightful

      Now is when you cash out, if you were wondering...

      Well the bitcoin network processes only 4 transactions per second. This hard limit will not let you cashout instantly.

  2. Next month... by ScentCone · · Score: 5, Insightful

    Next month, "Help me, other tax payers who aren't idiots! My mortgage is now bigger than the market value of my house. Make a law that makes the bank put my mortgage back the way it was! It's not fair!"

    --
    Don't disappoint your bird dog. Go to the range.
    1. Re:Next month... by Anonymous Coward · · Score: 3, Insightful

      "People have been taking out mortgages to buy bitcoins" = "I read on twitter one guy said he might take out a mortgage to buy more bitcoin".

      Seriously, if PEOPLE are taking out mortgages, I doubt it's many. Probably 1 or two. People are stupid, but surely not many are THAT stupid.

    2. Re:Next month... by Roger+W+Moore · · Score: 3, Insightful

      Luckily there simply isn't enough money in Bitcoin to result in any political will to bail this greedy fools out.

      That depends on who the fools are. Are you sure that no politicians have invested large sums in bitcoin?

    3. Re:Next month... by ScentCone · · Score: 2, Insightful

      then your not so veiled comparison to the mortgage crisis

      No, it's a not-so-veiled comparison to every other situation where people deliberately, knowingly, foolishly take on a mountain of debt they can't afford. And then start looking to other people - via government compulsion through taxes taken mostly from a small percentage of the population - to pay for it. It's no different than people stamping their feet and demanding that we elect Bernie Sanders because he's promising to eliminate the debt his supporters racked up getting a useless French Lit degree while attending an expensive out of state party school instead of living within their means and using the local community college for a fraction of the price. It's the sense of entitlement we're talking about. I'm entitled to some of that sweet bitcoin profit, and I'm entitled to make other people pay for the debt I took trying to get it. Just like people feel entitled to a profit flipping houses in a bubble market, and entitled to being bailed out when the bubble they helped create then breaks.

      --
      Don't disappoint your bird dog. Go to the range.
    4. Re:Next month... by ranton · · Score: 3, Insightful

      Seriously, if PEOPLE are taking out mortgages, I doubt it's many. Probably 1 or two. People are stupid, but surely not many are THAT stupid.

      You are ignoring the most powerful motivator to make risky financial decisions there is: "So many people are making so much money and i'll be an idiot if I am the only one making nothing!"

      There are probably thousands if not tens of thousands of people who have already invested far more money than they can afford to lose on Bitcoin. The National Council on Problem Gambling estimates that 2 to 3 percent of adults in the United States (as many as 9 million people) have serious problems with gambling. Another 3 million meet the criteria for “pathological gambling” (also known as “compulsive gambling”). These are the types of people who would think Bitcoin is a good investment; the kind which can double their money overnight. "If I only invest $1000 instead of $10,000 I will lose $9000 when the price doubles, I need to invest more!"

      Many people really will make a lot of money on this (many already have). Maybe Bitcoin goes up to $50k and today's investors will make serious money. But it is no different than doubling down on a good black jack hand. Eventually most people will probably lose big.

      --
      -- All that is necessary for the triumph of evil is that good men do nothing. -- Edmund Burke
    5. Re:Next month... by ranton · · Score: 3, Insightful

      To those modding this down, you do know "ignorant" is not just some derogatory remark, right? It is used to describe someone who lacks understand, such as someone who thinks the investor protections are unnecessary because average people should just be smarter.

      --
      -- All that is necessary for the triumph of evil is that good men do nothing. -- Edmund Burke
  3. Caveat emptor by nospam007 · · Score: 4, Insightful

    Stupidity is never a good investment.
    They should have done that when it was at 11 bucks, not 11.000.

    1. Re:Caveat emptor by Registered+Coward+v2 · · Score: 3, Insightful

      Stupidity is never a good investment. They should have done that when it was at 11 bucks, not 11.000.

      Unfortunately, the amount of stupidity in the universe seems to exceed the size of the universe. I read a quote to that effect on the internet so it must be true.

      This has all the makings of the Tulip Bubble combined with a pump and dump scheme. Folks who have a lot of BitCoins from early on are in a position to cash out and can manipulate the market to avoid a crash and run on it. The lack of liquidity on the sell side means the suckers ^H^H^H^H^H^H^H investors buying in now won't be able to easily pull out in a dip when they need money or take advantage of a rise in value to pay off the mortgage. All the big players need to is keep hitting new highs after dips to keep people from jumping in while they sell their cache for cash as tehy get out of the game. Volatility is their friend because all people see is a chance to make huge gains without understanding the underlying risk or fundamentals of the marketplace. Best of all, the manipulation is perfectly legal since it is unregulated and no one is selling BitCoin as an investment.

      --
      I'm a consultant - I convert gibberish into cash-flow.
  4. It's OK... by b0s0z0ku · · Score: 2, Insightful

    those of us that bought homes in 2008 will be more than happy to ...
    (1) take a HELOC
    (2) buy their homes at sheriff's auction when BTC crashes
    (3) rent them back to them (or evict them and rent to hard-working immigrants)
    (4) profit

    Every future crisis is just a path to profit.

  5. Bubble Indicator by TJ_Phazerhacki · · Score: 5, Insightful

    Isn't one of the key defining features of a bubble when a large number of relatively uniformed people decide to participate based on credit and margin? Tulips, the Great Crash, Great Recession, Internet Stocks, Great Recession...

    --
    Physics is nothing like religion. If it was, we'd have an easier time trying to raise money!
    1. Re:Bubble Indicator by leonbev · · Score: 4, Insightful

      Well, that and people trying to convince you that "This time is different, $FINANCIALPRODUCTX is a new paradigm! The old rules do not apply!", where $FINANCIALPRODUCTX was .com stocks in 1999 and spec home investing in 2006.

      Not that I think what I say here will sway anybody. Don't say that you haven't been warned, though.

    2. Re:Bubble Indicator by 0100010001010011 · · Score: 4, Insightful

      https://news.slashdot.org/comm...

      If you look at the history of crashes, nearly all have one thing in common: Many people investing with borrowed money. This happened with tulips, the South Sea Bubble, the 1929 crash, and the sub-prime mortgage crash. I am unaware of any bubble that did not involve a lot of people borrowing or buying on margin.

      So far that is not happening with bitcoin.

      "Less space than a nomad" in under 24 hours from ShanghaiBill.

  6. As a Bitcoin fanboy who expects it go higher...... by grnbrg · · Score: 2, Insightful

    If you are mortgaging your house to buy Bitcoin, you're a fucking idiot. You deserve the very real chance of losing everything, but your family doesn't.

    IF Bitcoin succeeds, a value of $100k-$500k is almost certain (As a floor. No one really has a clue what value a successful Bitcoin will plateau at over the long term.) -- Too many people and not enough supply for it to be otherwise. But Bitcoin is not yet a sure thing. Crypto in general may end up a failed experiment. Bitcoin specifically could implode, and be superceded by a different crypto. And even if it does succeed -- Bitcoin has had serious drops in the past -- seeing your investment drop to 25% of current value, and not recovering for 2 years is entirely possible.

    If you've got some spare cash, and it won't cause irreparable harm if it disappears completely, sure, invest that if you think Bitcoin will succeed. But no more than that.

  7. Re:Bitcoin Bailout by slew · · Score: 4, Insightful

    Though I am not on the cryptocurrency bandwagon, I am glad that it is a currency that no government would be willing to bail out in the invent it crashes. So that's good news for those taxpayers that constantly bailout companies' and governments' bad decisions. So please, by all means, underwrite your mortgage for Bitcoin, I need to buy the cheap real estate on fire sales. BTW, I won't be accepting Bitcoin as rent.

    Although nobody is gonna be bailing out BitCoin, you don't seem to understand how the mortgage bailout happened.

    The 2008 failure came from unsupported counter-party risk (incl obscure things like credit default swaps). That caused liquidity issues with Lehman brothers and AIG and other insurance companies. The problem wasn't with the mortgages, per-se, but with people betting on the mortgages (e.g., the people offering to insure them based on complicated financial arrangements that proved unsound). If people are taking out mortgages to buy bitcoin, they are taking on the risk, but if corporations do this, they generally hedge with insurance contracts and re-insurance (how else would you justify complicated financial arrangements).

    The problem is that if enough cards fall down, the corporations need the payouts from the insurance contracts. If all hell breaks loose, the companies that underwrote the insurance contracts are not going to be liquid enough to pay those out. Also, even those that thought they have bought insurance for other things (e.g., not bitcoin, not sub-prime mortgages) realize that the insurance company they paid premiums to all those years will evaporate and not make good on their payouts in other areas. This is when the bail out pressure mounts. You don't bail out the mortgages, you bail out the companies that underwrote the insurance contracts (like the US bailed out AIG for $85B and loaned JP Morgan Chase $29B to buy out the insolvent Bear Stearns) and the companies that wrote the mortgages ($200B for Freddie Mac and Fannie Mae). In comparison, only a measly $24B went for direct mortgage relief...

    Fortunately, BTC is probably too small to matter today. BTC market is only $276B total vs $10T for mortgage debt (~$5T pre-Year2000). Unfortunately, the Chicago Board has opened up BitCoin Futures to ratchet things up a level. With an established futures market, it will be possible to play BTC swings w/o being limited by actual BTC holdings. BTC holding insurance contracts can be written backed by BTC futures contracts and people can speculate on those as well. We'll see how big that futures and derivatives market gets relative to the underlying BTC (in some areas, you can see 10x the market in futures/derivatives over the underlying asset).

    Things are a bunch more intertwined than anyone might imagine. Get your popcorn ready, the show is about to start....

  8. Re:Bitcoin Bailout by ahodgson · · Score: 4, Insightful

    You missed the part where the corporations knew there was no chance the insurance could pay out, but only bought it so that they could legally not have to count the debt against their balance sheet. And the part where none of those criminals went to jail.