The Iraqi dinar “investment” opportunity seems to be rearing its head again. My dentist was inquiring about it just a week ago. Ebay is full of “opportunities” to get rich on the worthless dinar.

It is pitched as a way to profit from a nearly worthless Iraqi dinar that is “sure” to appreciate sometime in the future. The sellers say that millions of dollars in profits are sure to be had if you buy the dinars at today’s values and then exchange the dinars back for dollars at a later date once the dinar exchange rate has increased. It all sounds good and even logical too!

There are, however, some fundamental problems with the Iraqi dinar investment that potential buyers should be aware of before they begin investing:

Registration

It is illegal in the United States and most other major economies, to market an investment without appropriate securities registration. The sellers get around this requirement in two ways: First, it is legal to sell hard currency for its numismatic value. In other words it is possible to sell currency as a “collector’s item.” Second, some dealers will register with the U.S. Treasury as a Money Service Business (MSB).

Registering as an MSB is something that dinar dealers will do to put on the appearance of registration and government oversight. However, the difference between a legitimate MSBs and dinar dealers is that real MSBs are not marketing an investment.

If a seller/business has to lie to get around registration, are they really making a legitimate offer?

Misleading hype

The potential value of an investment in dinars is often illustrated with references to what happened to the Kuwaiti dinar following the first Gulf War and the German Deutschmark following World War 2. These would be good examples, except that neither was a free-floating currency at the time, so their value was mostly a function of policy making and official currency management.

Also, no rational investor would base an investing decision on two instances of past data (one more than 60 years in the past) without considering the number of times this investing strategy never paid off.

Will the Iraqi government pursue a policy of currency appreciation in the future? Since an appreciating currency makes funding your brand new government and paying off past debts more expensive, it seems unlikely. An economy in Iraq’s situation is more likely to experience a currency crash or intentional devaluation.

Many dinar dealers refer to the value of the Iraqi dinar prior to the 1990 Kuwaiti invasion (1 dinar = $3+ US Dollars) as evidence that the potential for the dinar is theoretically unlimited. They don’t mention that the pre-1990 dinar has been demonetized (worthless) and that its value was arbitrarily set by an autocratic regime led by Saddam Hussein. Following the embargo, the ability for the Iraqi government to manage its currency’s value collapsed and it spent the next 10 years at 2,000 – 3, 500 dinars to the U.S. Dollar.

Investment risks no one mentions

Assume that you are determined to “invest” in dinars despite the shadowy and misleading dealers you will have to work with. You should be aware of the following risks.

1. Liquidity

There is currently no active market for dinars. You can buy them but can you sell them? The difference between what you can buy dinars for and what you can sell them for is approximately 20%. This means that the dinar will have to appreciate by at least 20% before you could sell the currency back at break-even.

2. Currencies with extremely low values are often demonetized

It is quite common for countries with currencies that have very low values compared to other currencies to demonetize their existing hard currency and issue new currency with new values. For example, the Venezuelans (another oil economy) demonetized the Bolivar (trading at 2,150 to the USD) in 2008 and allowed currency owners to exchange 1,000 of them for 1 new bolivar. The new Bolivar now trades at 2.32 to the USD. We all sat and laughed as the Zimbabwe notes increased in size to 100 Trillion before they burnt out like a super nova. Zimbabwe too has followed suit and reissued a new Zim Dollar.

3. Inflation

Currently the Iraqi Central Bank is reporting monthly inflation rates that range between -4% (negative) to 8%. If the government and economy become more unstable than they are at present, those inflation rates could skyrocket. Hyperinflation destroys the value of hard currency. By the time the Turkish government revalued, in 2008 the lira had inflated to 1.5million lira to the USD.