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 (crypto) also known as cryptocurrencies, coins, or tokens which are digital assets that don’t have a physical form.
In my mind crypto is a high-risk investment.
This is because it is so volatile, often fluctuating by huge amounts within a short period.
And I’ll declare up front I don’t own any crypto as I’m not prepared to invest in anything I don’t understand — and neither should you.
For the first time in history — outside of a widespread markets collapse — a major so-called asset class has lost more than $US1 trillion (A $1.4 trillion) in three months.
But that’s what happened recently as the cryptocurrency market led by bitcoin has fallen more than 45 per cent since its October peak.
Despite this, over the last few years cryptocurrency had made a cultural turn, the price ballooned (and then fell again), the crypto buzz had nearly reached societal ubiquity and there has been a sharp 180° turn as what was once deemed "fringe", now has long time doubters beginning to embrace it and more investors are becoming concerned if they don’t have any crypto exposure.
In fact, at the end of 2021 more than 2 million Australians held crypto investments.
What is cryptocurrency?
Crypto-assets (crypto) also known as cryptocurrency, virtual or digital assets, is an emerging type of asset class that generally only exists electronically — it does not exist physically as coins or notes, but as digital tokens stored in a digital “wallet”.
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, as I said, 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).
A major reason for the price volatility of crypto is that some investors and many funds enter the crypto markets with highly leveraged margin deals.
Their equity is often geared up to 10 times.
This means that they can make huge fortunes when prices rise but they are savaged when prices fall.
However, collective insanity seems to have sprouted around bitcoin over the last decade and it’s hard to predict whether this cryptocurrency will become the global reserve currency or a store of value as widely accepted as gold or if it will be just another fad.
But the thrill of potential riches has made many investors want to chase the chance for massive profits from investing in bitcoin.
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.
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:
- 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.
- 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.
- Fake Mobile Apps.
Set up by scammers and available for download through Google Play and the Apple Appstore.
- 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.
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.
I recommend you research carefully and learn more about staying safe and protecting yourself in this emerging market before you start investing in cryptocurrency.