The Iraqi dinar investment opportunity a scam that has been around for a few years has recently been regaining much of its former popularity.

The opportunity is pitched as a way to profit from a nearly worthless Iraqi dinar that is sure to appreciate in the future. The scammers promise that millions of dollars in profits are virtually guaranteed if you buy the dinars at todays values (about 1,000 dinar to $1) and then exchange the dinars back for dollars at a later date once the dinar exchange rate has improved.

There are, however, some fundamental problems with the Iraqi dinar scam that potential buyers should be aware of before they begin investing in one of the most illiquid currency markets in the world:

Lack of registration

It is illegal in the United States (and most other major economies) to market an investment without appropriate securities registration. The scammers get around this requirement in two ways: First, it is technically legal to sell hard currency for its numismatic value. In other words it is possible to sell hard currency as a collectors 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.

So ask yourself: If a business has to lie to get around registration, is it really making a legitimate offer?

Dinars are sold on 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 II. 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.

It is also a fact that no rational investor would base an investing decision on two instances of past data (one more than 60 years in the past) without considering all the times this investing strategy did not pay 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 Iraqs 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 dont 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 currencys value collapsed and it spent the next 10 years at 2,000 3, 500 dinars to the U.S. Dollar.

Investment risks they wont tell you about

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? We surveyed several dealers and found that the difference between what you can buy dinars for and what you can sell them for is approximately 20 percent. This means that the dinar will have to appreciate by at least 20 percent before you could sell the currency back at break-even. It is worth noting that since the new dinar was introduced after the U.S. invasion it has only appreciated about 23 percent total.

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 2.15 to the USD.

The bottom line