Bitcoin virtual currency sounds like the wave of the future, but should you use it today? The Consumer Financial Protection Bureau (CFPB) has released a six page advisory document detailing the risks of using the popular virtual currency, bitcoin. Along with the explanation that virtual currencies are still experimental, the advisory included the following points:
Bitcoin isn't accepted same as traditional currency
Bitcoin and other virtual currencies are not backed by the government or by a bank. The currencies are not kept in a bank and require private keys so you can access a digital wallet. Should someone else discover your private key (not easy, but not impossible), they have access to your digital wallet.
Since no retailer, service provider or individual is required by law to accept payment in the form of bitcoin, it's not a convenient way to pay. More online retailers and a few stores are accepting bitcoin payments, but you'll still have a difficult time finding places to spend the virtual currency.
Bitcoin has tax implications
The IRS does not recognize bitcoin as a currency, but as property. Bitcoin owners are required to keep track of taxable gains and losses each time bitcoin is spent or sold. This is the same type of tracking that must be done with investments and stock trades, and it can get to be time consuming if not complicated.
You can get ripped off
While most bitcoin transactions work out as planned, rip offs are not unusual. The CFPB is collecting complaints, and many have reported paying for but not receiving goods and services, then not being able to get in touch with the seller. If you have a complaint, submit it to the CFPB.
Don't consider bitcoin to be an investment. While the exchange its based on can go up a great deal, it can also crash, as it did in one day by 61% in 2013 and 80% in 2014. Bitcoin can also used in ponzi schemes such as the one early in 2014 when the U.S. Securities and Exchange Commission sued the organizer of such a scheme that was advertised as an investment opportunity with up to 7% interest a week. Bitcoins that were "invested" were allegedly used to pay existing investors and the organizer’s personal expenses.
Learn more about bitcoin risks
To find out about more risks with bitcoin and other virtual currencies, see the August 2014 CFPB publication, Risks to consumers posed by virtual currencies, which can be read online or downloaded and printed. You can learn more about virtual currency scams and red flags of fraud in the Security and Exchange Commission's Ponzi schemes sing virtual currencies.