Investing in Crypto — A property expert’s guide

If you’re confused about cryptocurrencies, like Bitcoin and Ethereum, as an investment, you’re not alone.

What you’re about to read is a property expert’s take on crypto, so I’m not sure if it’s worth more than your hairdresser’s take on physical fitness.

I don’t profess to be an expert, but let me give you some insights into crypto assets, also known as cryptocurrencies, coins, or tokens, which are digital assets that don’t have a physical form.

In the rapidly evolving world of digital finance, cryptocurrency has emerged as a beacon for both innovation and controversy.

While the allure of high returns is undeniable, understanding these risks is crucial for making informed investment decisions.

Understanding Cryptocurrency

Cryptocurrency is a form of digital currency that uses cryptography for security and operates independently of a central bank.

It does not exist physically as coins or notes, but as digital tokens stored in a digital “wallet”.

Introduced with Bitcoin in 2009, the cryptocurrency market has expanded to include thousands of alternative coins, each with unique features and use cases.

You usually exchange cryptocurrency with someone online, with your phone or computer, without using an intermediary like a bank.

Bitcoin and Ether are well-known cryptocurrencies, but there are many different cryptocurrency brands, and new ones are continuously being created.

Anyone can create a crypto-asset, so at any given time there can be thousands in circulation.

People use cryptocurrency for quick payments, to avoid transaction fees that regular banks charge, or because it offers some anonymity.

But more and more investors (or really speculators) hold cryptocurrency as an “investment”, hoping the value goes up.

While some stores accept crypto as payment for goods and services, and some ATMs let you withdraw it as physical money, crypto is not legal tender in Australia and is not widely accepted as payment.

Instead, it is commonly used as a speculative, longer-term investment, as most people don’t access their balance for everyday transactions.

One of the problems for me is that the price of crypto is very volatile as it is not backed by assets and is only worth what people are willing to pay for it meaning the price fluctuates considerably solely based on market speculation.

Factors that can influence the price of crypto include media focus, public announcements, social media, and the public actions of individuals who hold large amounts of crypto or who influence the price through social media (sometimes for a fee).

How is cryptocurrency different from normal Dollars?

At its core, money is a token or symbol built on trust, that facilitates an exchange of one’s products or services for that token or symbol.

Historically, that trust has been forged by virtue of the backing of government entities.

On the other hand, cryptocurrency accounts are not backed by a government or insured by a government like Australian dollars deposited into a bank account.

If you store cryptocurrency with a third-party company, and the company goes out of business or is hacked, the government has no obligation to step in and help get your money back.

All this stems back to the 2008 Global Financial Crisis which took down the global financial system and the flow of money came to a standstill.

The libertarian cryptocurrency underground took notice and their response to the world’s seemingly flawed centralized financial system was Bitcoin.

Bitcoin runs over a network of computers that belong to many people, spread out across the globe, who are collectively charged with maintaining and validating its ledger of accounts.

No government, no banks, no financial institutions, no middlemen.

Just like-minded people with computers, glued together with a common purpose — to create a financial system that was independent and decentralized.

The mechanism for validating that ledger is something called Blockchain.

Blockchain is encrypted software or an algorithm.

Thousands of individual computer systems must all validate each transaction that occurs on the Bitcoin Blockchain ledger.

Because that validation process is foolproof, meaning always 100% accurate, it has slowly built trust for those who use it.

This trust in Bitcoin represents a counterweight to the need for traditional currencies backed or guaranteed by a government entity and run by a complex labyrinth of financial partners that, together, represent the current global financial system.

Slowly, Bitcoin has become a new token or symbol built on trust to facilitate an exchange of one’s products or services for that token or symbol.

In other words, thanks to Blockchain technology, cryptocurrencies, like Bitcoin, are quickly evolving from a crypto asset to a form of currency that can be used just like money.

There are now a lot of cryptocurrencies modeled after bitcoin.

Currently, there are more than 8000 cryptocurrencies in existence, and though some of these currencies may have some impressive features that bitcoin does not, matching the level of security of the bitcoins network has yet to be seen.

Though many of these cryptos have little to no following or trading volume, some enjoy immense popularity among dedicated communities of backers and investors.

Another major difference to normal currencies is that, as I’ve explained, cryptocurrency values change constantly and often rapidly, even changing by the hour.

This means your investment that’s worth thousands of dollars today might be worth only hundreds tomorrow.

And, if the value goes down, there’s no guarantee it will go up again.

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Why Caution is Critical in Cryptocurrency Investment

While diversification and the potential for high returns may attract investors to cryptocurrencies, the associated risks are substantial and often different in nature from traditional investments like real estate:

1. Extreme Volatility: Unlike most traditional investments, cryptocurrencies can experience extreme volatility. Prices can surge or plummet within hours based on factors like technological changes, speculative news, and market sentiment, which can be distressing and financially damaging for investors not used to such swings.

2. Regulatory Uncertainty: The regulatory landscape for cryptocurrency is still in flux, which adds a layer of risk. Changes in regulations can have dramatic impacts on the value and legality of cryptocurrencies. For instance, announcements of stricter regulations or bans in certain countries have historically led to significant price drops.

3. Lack of Tangibility: Unlike real estate, cryptocurrencies do not represent a physical asset. This intangibility can be a significant risk during market crashes, as there is no underlying physical asset to retain a baseline value.

4. Security Concerns: The digital nature of cryptocurrencies makes them susceptible to hacks and cyber theft. High-profile breaches have led to substantial losses for investors who had their digital wallets compromised.

5. Market Manipulation: Smaller market capitalization and lower liquidity can make some cryptocurrencies prone to manipulation by large holders, known as "whales," who can influence prices through large buy or sell orders.

Look at this for volatility

This is because it is so volatile, often fluctuating by huge amounts within a short period.

Cryptocurrencies have experienced several significant price corrections throughout their history, with some of the most notable ones occurring:

1. 2011 Bitcoin Crash: After reaching a peak near $32, Bitcoin's price crashed to just $0.01 on the Mt. Gox exchange due to a security breach, although prices quickly recovered to about $2, representing a nearly 99% drop in value on the affected exchange temporarily.

2. 2013-2014 Bitcoin Crash: Bitcoin hit a high of around $1,150 in December 2013 but then fell to around $200 by January 2015, which is about an 83% decrease. This crash was influenced by the Mt. Gox bankruptcy and other factors like tightening regulations in China.

3. 2017-2018 Cryptocurrency Crash: After reaching an all-time high of nearly $20,000 in December 2017, Bitcoin's price dropped to below $6,500 by mid-2018 and further down to around $3,200 by December 2018. This represents a drop of approximately 80%. The entire market suffered during this period, with many altcoins losing even a greater percentage of their value.

4. March 2020 (Black Thursday): The onset of the COVID-19 pandemic caused widespread panic and financial market crashes, including the cryptocurrency market. Bitcoin's price fell from about $7,900 to $4,600 in just a few days, roughly a 42% drop.

5. May 2021: Bitcoin and other cryptocurrencies experienced a significant crash after a bull run that took Bitcoin to a new high of around $64,000 in April 2021. By July 2021, Bitcoin had fallen to under $30,000, marking a decrease of about 53%. This crash was influenced by a combination of factors including new Chinese regulations on cryptocurrency trading and mining, Tesla reversing its decision to accept Bitcoin as payment due to environmental concerns, and overall market dynamics.

These corrections reflect the volatile nature of cryptocurrency markets, where regulatory news, technological developments, market sentiment, and macroeconomic factors can dramatically impact prices.

Just to make things clear... I don’t own any crypto as I’m not prepared to invest in anything I don’t understand — and neither should you.

Buying and storing crypto

You can buy or sell crypto through one of the many online exchange platforms using traditional money or even PayPal.

Some people earn cryptocurrency through a complex process called “mining,” which requires advanced computer equipment to solve highly complicated math puzzles.

Cryptocurrency is stored in a unique digital wallet, which can be online, on your computer, or on an external hard drive.

But if something unexpected happens — your online exchange platform goes out of business, you send cryptocurrency to the wrong person, you lose the password to your digital wallet, or your digital wallet is stolen or compromised — you’re likely to find that no one can step in to help you recover your funds.

And, because you typically transfer cryptocurrency directly without an intermediary like a bank, there is often no one to turn to if you encounter a problem.

Watch out for Crypto scams

The stunning growth of cryptocurrency markets from bitcoin to dogecoin also came with another risk — the steep rise in illicit activity and scams.

In 2021, crypto-based crimes hit a new all-time high with illicit addresses receiving $14 billion, nearly 80% higher compared to the $7.8 billion seen in 2020.

These crimes included the ongoing threat of ransomware and NFT (non-fungible token) related frauds.

But two rising trends are scamming and stealing funds, with decentralized finance being the common denominator.

This led the Australian Securities and Investments Commission to warn that retail investors face potentially large losses on risky crypto assets and dodgy managed investment schemes and recommend people should seek financial advice before allocating money into riskier assets that they don’t understand.

As for avoiding scams, watch out for:

1. Phishing attacks.
   
   This is where someone will send you a message, most likely through email, pretending to be someone you are familiar with to gain your trust and ask for your details.
   If you give your details, either through email or on a website that the message has directed you to watch out for — your funds will be removed very quickly! What happens is malware (computer viruses) will look through your device to find your cryptocurrency wallet details and will attempt to drain any wallets that you have of their contents.
2. Imposter websites,
   that have been set up to resemble original, valid startup companies.
   If there isn't a small lock icon indicating security near the URL bar and no "https" in the site address think twice.
3. Fake Mobile Apps.
   Set up by scammers and available for download through Google Play and the Apple Appstore.
4. Bad Tweets and other Social Media Updates.
   If you're following celebrities and executives on social media, you can't be sure that you're not following impostor accounts. If someone on these platforms asks for even a small amount of your cryptocurrency, it's likely you can never get it back.
   Just because others are replying to the offer, don't assume they aren't bots, either.
   You have to be extra careful.
   

Unfortunately, there are many ways that scammers exploit unsecure the internet to mine or steal cryptocurrency.

Strategies for Managing Crypto Investment Risks

If you decide to venture into cryptocurrencies, consider these strategies to mitigate risks:

• Risk Capital: Only invest money that you can afford to lose. Unlike real estate, where the market generally trends upwards over time, cryptocurrency investments can lose all value.

• Research and Due Diligence: Stay informed about the coins you invest in and the overall market conditions. Understanding the technology behind cryptocurrencies and the factors that affect their prices is essential.

• Diversification: Just as with traditional investment portfolios, diversifying your crypto investments can help spread risk. Consider different cryptocurrencies and other asset classes.

• Security Measures: Prioritize security by using hardware wallets and enabling multi-factor authentication on all platforms. Regularly update your knowledge on the best practices for digital security.

The bottom line

If you don’t understand a financial product, don’t invest in it.

Investing in cryptocurrency is like buying a very expensive lottery ticket; there’s no guarantee of a huge payoff.

While the innovative allure of cryptocurrencies and their potential for high returns is compelling, the risks are significant and require careful consideration.

For property investors looking to diversify into cryptocurrencies, it is crucial to approach with a strategy that acknowledges these risks and includes measures to mitigate them. Understanding both the potential and the pitfalls will help in making more informed and resilient investment decisions.