Risk Disclosures
You must evaluate your particular financial circumstances to determine
whether or not trading cryptocurrencies is appropriate for you. You should not
invest funds in cryptocurrencies that you cannot afford to lose. The trading of
cryptocurrencies can result in substantial losses, including most if not all
of your investment. For that reason, you should not use funds that are earmarked
for special purposes, such as retirement funds, debt repayment funds, amounts
needed for emergency expenses, tuition or household expenses or funds otherwise
required by your lifestyle, to trade cryptocurrencies.
Unique Features of Crypto Currencies:
Cryptocurrencies are digital instruments that are intended to function as
a store of value or a medium of exchange. Although cryptocurrencies are often
exchangeable for various fiat currencies, unlike fiat currencies, cryptocurrencies
are not backed by any government or central bank and do not constitute legal tender.
Cryptocurrencies have no intrinsic value and there is no investment underlying
cryptocurrencies. The price of cryptocurrencies is based on the agreement of the parties
to a transaction, which may or may not be based on the market value of the cryptocurrency
at the time of the transaction.
Insurance:
Accounts holding cryptocurrencies are not protected by SIPC coverage.
Cryptocurrencies are also not covered by the FDIC, which covers fiat currency
held in member banks. Existing insurance products are inadequate to cover
potential losses if an exchange fails and/or digital wallets are hacked.
Price Volatility:
Cryptocurrencies derive their value from the markets in which they trade,
and the markets for cryptocurrencies are global. The price of cryptocurrencies
is based on the perceived value of the cryptocurrency and subject to changes in
sentiment, which make these products highly volatile and unpredictable. The
fluctuations of cryptocurrency prices are much greater than the price fluctuations
of fiat currencies, which are also risky to trade. Certain cryptocurrencies have
experienced daily price volatility of more than 20%, including sudden drops in price.
If participants in a given cryptocurrency market change their view about the value
of a given cryptocurrency versus fiat currency, the price of the cryptocurrency can
decline precipitously. It may be difficult to liquidate a position in cryptocurrencies
at all or, if possible, such liquidation may occur at a significant loss. It is
possible that the market for a given cryptocurrency can collapse altogether.
Valuation and Liquidity:
Cryptocurrencies can be traded through privately negotiated transactions
and through numerous cryptocurrency exchanges and intermediaries around the world,
each with its own pricing mechanism and/or order book. Generally accepted auditing
methods for cryptocurrencies do not exist and cryptocurrency platforms do not have
consistent methods for auditing their holdings and some do not have audits at all.
The lack of generally accepted auditing methods and a centralized pricing source
poses a variety of valuation challenges. In addition, the dispersed liquidity may
pose challenges for market participants trying to exit a position, particularly
during periods of stress.
Cybersecurity:
The cybersecurity risks of cryptocurrencies and related “wallets” or
spot exchanges include hacking vulnerabilities, cybersecurity attacks and
a risk that publicly distributed ledgers may not be immutable. A cybersecurity
event could result in a substantial, immediate and irreversible loss for
market participants that trade cryptocurrencies. Cryptocurrency transactions
may be irreversible, and, accordingly, losses due to a cybersecurity event may
not be recoverable. Even a minor cybersecurity event in a cryptocurrency is
likely to result in downward price pressure on that product and potentially
other cryptocurrencies. In addition, the trading of cryptocurrencies may be
adversely affected by network connectivity issues and dissemination of inaccurate
data. You may incur losses due to software or hardware failures and system failures.
Opaque Spot Market:
Not only are the cryptocurrency markets volatile, but they are subject
to fraud and other trading aberrations. Cryptocurrency balances are generally
maintained as an address on the blockchain and are accessed through private
keys, which may be held by a market participant or a custodian. Although
cryptocurrency transactions are typically publicly available on a blockchain
or distributed ledger, the public address does not identify the controller,
owner or holder of the private key. Unlike bank and brokerage accounts,
cryptocurrency exchanges and custodians that hold cryptocurrencies do not
always identify the owner. The opaque underlying spot market poses asset
verification challenges for market participants, regulators and auditors and
gives rise to an increased risk of manipulation and fraud, including the
potential for Ponzi schemes, bucket shops and pump and dump schemes, which may
undermine market confidence in a cryptocurrency and negatively impact its price.
Most cryptocurrency platforms do not have surveillance systems and rules intended
to prevent market manipulation or other forms of abusive trading nor do they have
the ability to enforce such rules. Trading by employees of the platforms and the
platform themselves are often not adequately restricted to prevent trading abuses.
Cryptocurrency Exchanges, Intermediaries and Custodians:
Cryptocurrency exchanges, as well as other intermediaries, custodians and
vendors used to facilitate cryptocurrency transactions, are relatively new and largely
unregulated in both the United States and many foreign jurisdictions. There are no
standard capital requirements for cryptocurrency platforms nor are there guarantors
in the event a cryptocurrency exchange fails. The opaque underlying spot market and
lack of regulatory oversight creates a risk that a cryptocurrency exchange may not
hold sufficient cryptocurrencies or other funds to satisfy its obligations and that
such deficiency may not be easily identified or discovered. In addition to a higher
level of operational risk than regulated futures or securities exchanges, cryptocurrency
exchanges can experience volatile market movements, flash crashes, fraud, various forms
of market manipulation, theft, transaction processing delays and other cybersecurity
risks. Trading in cryptocurrencies may be halted by the various trading venues due to
unusual trading activity, outages or other problems with a cryptocurrency platform. If
Bakkt experiences such technical difficulties, those difficulties could prevent
you from accessing the cryptocurrency in your Bakkt account. Bakkt may not
have sufficient financial coverage through bonds, insurance or other products to repay
your losses. Some cryptocurrency transactions shall be deemed to be made when recorded
on a public ledger, which is not necessarily the date or time that the customer initiates
the transaction. Before you engage in trading cryptocurrencies, you must become familiar
with the platform on which the relevant cryptocurrency trades. Generally, there is limited
information about the various cryptocurrency platforms and because these platforms are
complex and technically difficult for the average person to understand, you will need to
put forth substantial effort to obtain the information necessary to understand the risks
you are undertaking. You should understand the functions, operations and uses as well as
the history for the platforms on which you invest. As described above, some platforms are
subject to a variety of serious attacks, which may result in the loss of your cryptocurrency.
Regulatory Landscape:
Different geographic locations have different rules, or oftentimes no rules,
that apply to the trading of cryptocurrencies. One or more jurisdictions may, in
the future, adopt laws, regulations or directives that affect cryptocurrency networks
and their users. Changes in government regulation, such as the suspending or restricting
of trading activity in a particular cryptocurrency or currencies, may adversely affect
your ability to trade and exchange your cryptocurrencies and may decrease the value of
any cryptocurrency in your account.
In the United States, cryptocurrency markets are not subject to federal regulatory oversight,
but cryptocurrency exchanges are subject to federal anti-money laundering regulation and
may be regulated by one or more state regulatory bodies. As compared to regulated markets,
such as the United States securities markets, there are no uniform regulations governing
trading or other mechanisms to prevent market manipulation or to normalize the cryptocurrency
markets when they experience volatility issues. Unlike the laws, rules and regulations
governing the United States securities markets, there are generally no laws, rules or
regulations that require anyone to continue to support a cryptocurrency market, and there
is no assurance that a person who accepts a virtual currency as payment today will continue
to do so in the future.
Notwithstanding the foregoing, many cryptocurrency derivatives are subject to regulation by
the CFTC. In addition, the SEC has cautioned that many initial coin or “token” offerings
are likely to fall within the definition of a security and subject to U.S. securities laws.
As a result, cryptocurrencies currently face an uncertain regulatory landscape in the United
States and many foreign jurisdictions.
Technology:
The relatively new and rapidly evolving technology underlying cryptocurrencies
introduces unique risks. For example, a unique private key is required to access, use
or transfer a cryptocurrency on a blockchain or distributed ledger. The loss, theft
or destruction of a private key may result in an irreversible loss.
Changes in the technology of a given cryptocurrency platform or changes resulting from
cybersecurity attacks include but are not limited to a “fork,” which can have a negative
impact on the value of a particular cryptocurrency and can result in the loss or
cancellation of a cryptocurrency position or a sudden loss of value. The ability to
participate in forks could also have implications for investors. For example, a market
participant holding a cryptocurrency position through a cryptocurrency exchange may be
adversely impacted if the exchange does not allow its customers to participate in a fork
that creates a new product.
Transaction Fees:
Many cryptocurrencies allow market participants to offer miners (i.e., parties
that process transactions and record them on a blockchain or distributed ledger) the
ability to earn a fee. While not mandatory, a fee is generally necessary to ensure that
a transaction is promptly recorded on a blockchain or distributed ledger. The amounts
of these fees are subject to market forces, and it is possible that the fees could increase
substantially during a period of stress. In addition, cryptocurrency exchanges, wallet
providers and other custodians may charge relatively high fees as compared to custodians
in many other financial markets.
Investor Alerts:
A number of governmental and self-regulatory agencies have published information
alerting the public of the risks of digital currency. For example, see
the CFPB's Consumer Advisory,
the CFTC's Customer Advisory,
the SEC's Investor Alerts, and
the FINRA's Investor Alerts.