A Look Back at Bitcoin’s 11th Year

Did you know that the first Bitcoin whitepaper was published in October 2008, and the first Bitcoin transaction took place in January 2009? As Bitcoin’s 11th year, 2019 brought a lot of exciting new developments. On the one hand, the value of bitcoin as a currency was up 84% in 2019. On the other hand the price of BitCoin has fluctuated greatly, amidst all of the hype for the cryptocurrency there are as many sceptics as there are supporters.

Unfortunately, 2019 also gave rise to some bad actors in the digital investment arena. In response, the Securities and Exchange Commission (SEC) increased regulatory enforcement. Now, let’s take a look at the complex and volatile world of Bitcoin activity in 2019.

More Women, More Bitcoin?

Contrary to popular belief, Bitcoin isn't just for men. Evidence suggests that crypto investment opportunities attract many women as well. Grayscale Investments, creator of the Grayscale Bitcoin Trust (GBTC), conducted a 2019 study to get a handle on what U.S. investors think about Bitcoin. As cited in a December 2019 Yahoo Finance article, the study found that, of the one-third of investors expressing interest in Bitcoin, 43% were women. Interestingly, among Bitcoin's features for investors, women favored the ability to purchase fractional amounts of bitcoin to control their risks.

Bitcoin Whales Affect Price Swings

When large investors decide to sell, they can drive prices down or cause rapid shifts in the market due to their size. Although individuals can purchase multiple Bitcoins or just a small fraction of one, some investors called "Bitcoin whales" actually hold a significant portion of the Bitcoins currently in circulation. According to Flipside, the top 1,000 Bitcoin addresses manage 34.8% of the total supply. However, it’s important to note that some of the owners of these addresses are family offices and other investors with multiple clients. Additionally, as cited in a December Bloomberg article, Coin Metrics found that investors possessing between 1,000 and 1 million Bitcoins hold 42.1% of the entire supply. This finding represents a 4.2% increase from 2017 data. Bitcoin had a surge price in 2018, making it highly valuable at a valuation of over $16,000. Since then, the value has decreased, leading to many turning away from the once-popular cryptocurrency. Although Bitcoin rose above $10,000 in February 2020 as reported by Decrypt.com, the price has since dropped, continuing the trend of unpredictability. Time will tell if Bitcoin continues to increase in price and whether the impending halving in May 2020 will affect further price swings.

Fraudulent Actors Muddy the Crypto Investment Waters

Bitcoin investors need to watch out for bad actors. For instance, a recent Bitcoin Ponzi scheme raised over $722 million USD for supposed investment in a Bitcoin mining pool. According to a December 2019 Department of Justice press release, federal prosecutors charged the operators of BitClub Network with conspiracy to offer and sell unregistered securities. Two of the defendants also faced charges of conspiracy to commit wire fraud. Three of the defendants were arrested in the U.S., one in Germany, and one was still at large as of the press release date of last revision.

Here's how this unscrupulous Ponzi scheme worked. From 2014 to 2019, operators of BitClub Network used fictitious "Bitcoin mining earnings" figures to entice prospective investors and also incentivized investor recruitment. Furthermore, the network operators manipulated these supposed earnings to maximize their profits at the expense of the duped investors.

SEC Enforcement on the Rise

The SEC released its Division of Enforcement 2019 annual report in December 2019. As cited in the RIA Compliance and Practice Management Blog, the 862 SEC enforcements in 2019 included 526 stand-alone enforcement actions, among others. 191 of these were against investment companies and advisers, representing an approximately 77% increase over 2018 enforcements. According to global law firm DLA Piper, these stand-alone actions against investment advisers and firms represented 36% of enforcement cases for that year.

Here’s an example of a group of stand-alone enforcement actions: The SEC Division of Enforcement is taking action against advisory firms that do not disclose conflicts of interest affecting the selection process for fee-paying mutual fund share classes when a less expensive or no-cost share class of the same mutual fund is available. Under the Share Class Selection Disclosure Initiative, the Division decided to recommend standardized settlement terms for those firms that self-report these failures to disclose. This specific initiative alone resulted in 95 enforcement actions in 2019. Additionally, over $135 million USD went back to affected mutual fund investors as a result, and most of them were retail investors, according to the DLA Piper report.

In addition to the stand-alone actions, 2019 gave rise to 210 follow-on administrative proceedings and 126 enforcement actions related to delinquent filings, according to the RIA blog. Specifically, new 2019 crypto investment developments included charges of unlawful promotion of ICOs, as well as a settlement against a digital asset trading platform for operating as an unregistered national securities exchange, according to DLA Piper. Further highlights of the annual report include a focus on cybersecurity recommendations and retail investor protections. Also included were investigations of many initial coin offerings (ICOs) and other digital assets, as well as cybersecurity threats to both regulatory entities and public companies. Notably, the SEC often holds individual directors and officers accountable, in addition to taking action against the companies they manage.

In general, as cited in a November 2019 article in Investment News, 2019 enforcement actions were at their highest level since 2016. The 2019 judgments and orders resulted in disgorgement and penalties totaling $4.3 billion, with $1.2 billion returned to harmed investors. These two monetary totals were at their highest since 2015. Investment News details the enforcement category breakdowns among all 862 actions as follows: "For the second year in a row, the SEC brought the most stand-alone enforcement actions against investment advisers and investment companies, at 191. The next-highest category was securities offerings, at 108. The number of actions against broker-dealers fell to 38 in fiscal 2019 compared to 63 in fiscal 2018." Additional categories were issuer reporting/accounting and auditing (17%), actions against broker-dealers (7%), insider trading (6%), market manipulation (6%), Foreign Corrupt Practices Act enforcement (3%), and public finance (3%), as cited by DLA Piper.

In conclusion, crypto investment opportunities remained relatively high risk, with the potential for high yields. Unscrupulous investment opportunities, price swings, and increasing SEC regulation are all essential factors to consider. Furthermore, with the increase in SEC regulatory enforcement in the crypto investment space, it is more important than ever for both issuers and investors to remain aware of the changing legal landscape of securities offerings. To stay in-the-know, follow the VerifyInvestor.com blog.