The US Securities and Exchange Commission (SEC) has urged investors to be cautious when investing in the Bitcoin futures market. The regulator cited heightened risks that most often outweigh the potential of investing in the product.
The warning was issued by the SEC Office of Investor Education and Advocacy (OEIA) and the Commodity Futures Trading Commission Office of Customer Education and Outreach (OCEO). As per the bulletin, investors should evaluate the volatility of bitcoin and bitcoin futures, the lack of regulation, and the potential of losing funds from fraudulent dealings.
Investor Company Act of 1940
The bulletin also referred to the Investment Company Act of 1940 and how it requires firms to offer guidelines for investor protection. According to the bulletin, “funds must comply with legal requirements related to valuation and custody of fund assets, and mutual funds and ETFs must comply with liquidity requirements. Those protections apply to all of a fund’s holdings, including holdings of Bitcoin futures contracts.”
Factors Investors should consider
As part of investor education, the financial market regulator also gave a guideline on how investors who want to invest in bitcoin futures should exercise caution. The regulator urged investors to consider the level of risk associated with investing in this product and compare it with their risk tolerance.
Investors should also evaluate how the fund discloses principal risks to investors. Moreover, the regulator pointed out the potential of fraud and manipulation in the bitcoin market, leading to the loss of their investment.
According to the bulletin, investors need to be aware that a rise in bitcoin prices does not necessarily mean a rise in their investment in crypto futures. The prices of bitcoin futures can be different from the value of the underlying asset. Hence, an investor should seek to understand the extent of difference in their investment outcome.
Most importantly, an investor needs to look at the different funds that buy and sell bitcoin futures and group them according to the level of risk. Before investing in the area, an investor is also advised to understand how the product can help meet their investment objectives.
The SEC has been vigilant about protecting investors who are venturing into the crypto market. Recently, the financial market watchdog started cooperating with the legislature in Congress and other regulatory bodies to formulate a clear roadmap that will help them protect investors who venture into the crypto market.