US Regulator Encourages Crypto Investors to Do Their Own Research, Watch for 10 Key Factors

In a new advisory notice from the Commodity Futures Trading Commission (CFTC), crypto enthusiasts are being urged to proceed with caution.

The notice, entitled “Use Caution When Buying Digital Coins or Tokens”, is designed to temper over-exuberant investors and encourage people to do their own research.

“Estimates of fraud range from 5 percent to more than 80 percent of ICOs. One report also identified nearly 300 offers that contained plagiarized investment documents, promises of guaranteed returns or fake executive teams,” the advisory states.

Even if a project isn’t fraudulent, investing in new technologies requires caution, lots of due diligence (reading, Googling and cross referencing your sources) and close attention to a company’s underlying technology and purpose for being – for example, what problem is the product or service trying to solve? If there is no clearly articulated purpose, it should raise concerns. If the innovation is solving real world issues, it may merit consideration.

The CFTC points out that a company should raise suspicion if it promises success, a guaranteed trading strategy, a locked-in profit rate or an upcoming windfall due to the network effect of increasing adoption.

Finally, the advisory outlines a list of 10 factors that can influence an investment over time.

• Potential forks in open-source applications could split away market participants, increase the supply of digital coins, or make your coins obsolete
• A decrease in mining or validation costs could affect the price of your coin, if price is tied to those factors
• The acceptance of other currencies, coins or tokens for offered goods and services, i.e. strong competitors
• The link between the value of a digital coin or token and the offered product or service
• Adoption of the digital coin or token as a broad medium of exchange or store of value
• Future competitors or technological changes that could disrupt the underlying business
• Future demand or uses for an application, network, product, or service
• Liquidity in the market for a specific digital coin or token
• Changes to the underlying technology that could devalue your digital coins or tokens
• Risk of theft from hacking

The advisory was prepared by the CFTC’s Office of Customer Education and Outreach and LabCFTC to promote responsible fintech innovation and fair competition.