Things to Consider When Investing in a Trend
Cryptocurrency and marijuana investments have garnered significant media attention in recent months. In this post, we are exploring the risks associated with investing in these two trends. We suggest questions you should be asking yourself and highlight the risks associated with cryptocurrency and marijuana investments.
Why Am I Investing?
Before making any investment, the first question you should ask yourself is why you are considering investing in a specific sector or company. There is nothing inherently wrong with investing in emerging areas, but the key is to understand whether this investment is right for you. It is also important to make sure you are not investing solely for fear of missing out.
Is the Investment Based on Fact or Fear, Assumption, and Desire (FAD)?
When you come across a trend that all those around you are telling you to invest in, take a moment to think; am I investing based on fact or FAD?
Crypto-investments encapsulate anything cryptocurrency-related be it initial coin offerings (ICO), crypto-investment funds or crypto coins or tokens. Crypto (or digital) currencies have no backing from a central bank and therefore have no intrinsic value, which can cause their value to fluctuate wildly. Over the past year, we have seen the values of many cryptocurrencies skyrocket, but we have also seen them plummet. Common digital currencies include Bitcoin, Ethereum, and Ripple.
What to Keep in Mind When Investing in Crypto-investments
When you see how quickly the price for cryptocurrencies increases, it can seem quite alluring to invest, but it is important to keep a few things in mind.
- International scope: the company can be located anywhere in the world. If the company is outside B.C. or Canada, it may be impossible to recover your funds if there is a problem. Even if it is domestic, there is a risk you won’t be able to recover your funds.
- Price volatility: the price of a cryptocurrency can swing up and down significantly. Make sure to understand your risk tolerance before investing.
- Lack of liquidity: it may be hard to find a buyer at a fair price for a cryptocurrency if you choose to sell.
- May not be a security: if a cryptocurrency or coin is not a security, investor protections under securities laws do not apply
- Risk of fraud or identity theft: it can be difficult to tell who is behind certain crypto wallet services or coin/token exchanges. These services often ask for personal information, and there is no government-backed deposit insurance offered for these services. Investors have to rely on their computer security systems to protect purchased cryptocurrencies from theft.
- Unregulated companies: investors in cryptocurrency are highly reliant on unregulated companies. Some of these companies may lack appropriate internal controls and therefore might be more susceptible to fraud and theft than regulated companies.
The North American Securities Administrators Association (NASAA) released a video regarding the risk associated with cryptocurrencies and ICOs.
Investing in Marijuana
By the summer of 2018, Canada will become the first G7 nation to fully legalize marijuana for recreational use. Given the impending legalization and expected market demand for the product, many companies are entering this sector and are actively seeking investors.
What to Keep in Mind When Investing in Marijuana
With the pending legalization of marijuana in Canada, you may be considering an investment in the companies involved in different aspects of the marketplace including the growing, cultivation, or distribution. There are many questions to keep in mind when contemplating whether to invest in a marijuana company.
We have created a list of a few other things you should consider before investing.
- A medical marijuana distributor must be licensed in order to grow product for legal distribution. In Canada, licensing is regulated by Health Canada.
- There is a large amount of uncertainty in this sector that could negatively affect an investment at any time.
- There are many companies entering the industry and the actual market has no clear definition yet. There are currently 86 companies licensed with Health Canada, compared to only 42 about six months ago.
- Regulations for distribution differ across provinces and are untested at this point. This could lead to unexpected barriers and cost for different companies.
When Investing in a Trend, Always:
- research (using the web or a registered investment advisor)
- know your goals and your risk tolerance and make sure the investment matches your goals and tolerance for risk. With any investment there is risk and uncertainty that could see you lose all the money invested – are you okay with that?
- know your investment advisor or the person offering the investment – are they registered?
- keep an eye out for the warning signs of investment fraud:
- promise of high returns, low risk
- limited time offer – you must get in now
- unsolicited offers – just for you
If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Inquiries at 604-899-6854 or 1-800-373-6393 or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymously using BCSC’s online complaint form.
InvestRight.org is the British Columbia Securities Commission’s investor education website.