Pending regulations will make it easier to invest safely in crypto assets

Despite the scepticism that greeted bitcoin when it first appeared in 2009, it seems cryptocurrencies are here to stay. But even investors with an appetite for high risk need to know that they’re investing safely. By

Bitcoin, ethereum, dogecoin. The list of cryptocurrencies seems endless. Globally, there are now more than 15,000 cryptocurrencies available with a total market value of more than R48-trillion. Regardless of the immense scepticism that greeted Bitcoin when it first appeared in 2009, it seems cryptocurrencies are here to stay.

With values as high as R664,334 for one bitcoin (as per Luno) on 18 January, you may well be wondering if you shouldn’t be adding this asset to your investment portfolio. But before you dive in and start buying crypto assets, you need to be sure that you are investing safely.

Crypto assets are not currently regulated in South Africa. However, the Intergovernmental Fintech Working Group, which is a joint initiative including the National Treasury,

the Financial Sector Conduct Authority, the South African Reserve Bank, the South African Revenue Service and the Financial Intelligence Centre, released a position paper last year confirming it has taken steps towards regulating the crypto space.

This will be implemented by regulating service providers in the crypto space rather than the crypto assets themselves.

Marius Reitz, general manager for Luno Africa, says several asset managers are working to craft crypto products and solutions in anticipation of local regulations.

“Previous attempts to list a bitcoin ETF [exchange-traded fund] on the local stock exchange have not been successful, but the listing of crypto instruments on the JSE will be a watershed moment that will allow asset managers to enter crypto.

“Regulation will also boost the number of formal partnerships between banks and crypto companies, which will facilitate greater crypto adoption,” he says.

Simple ways to invest

Nico Katzke, head of portfolio solutions at Satrix, says investors should only use the portion of their portfolios in which they can stomach significant losses on to invest in crypto assets.

“That portion should not impact your overall cash-flow position. As with all investment strategies, enlisting the help of a qualified financial adviser is a really good idea. Factors such as your age, size of the portfolio, earning potential will all play a strong role. Your investment plan should generally include some slow and steady investments [that are] less risky, and others that add the riskier cream on top,” Katzke says.

He adds that there are a few easy ways to invest in cryptocurrencies via apps such as EasyEquities and platforms such as Luno. EasyEquities launched the EC10 exchange-traded fund in June last year. It allows you to invest in the top 10 crypto assets weighted by market cap. These include bitcoin, ethereum and XRP.

Gaurav Nair, co-founder of alternatives investments firm Jaltech, points to the old Chinese proverb, “The journey of a thousand miles starts with one step”, saying it rings true for investing in cryptocurrency.

“Make that first investment, even if it’s just R200. Giving yourself some exposure to the market will result in you starting to track the performance of the investment.

“There is no better way to develop your knowledge and understanding of an investment than to be in the market,” he says.

Katzke says it is important to use a reputable service provider or platform when you venture into crypto trading or investing.

“If you are not savvy enough to trade on open exchanges, you should consider platforms that make it easy to convert fiat currency [traditional government-issued currency] into cryptocurrency and back.

“Unfortunately, while providing unique diversification and unparalleled upside potential, crypto assets also have the ability to lose value sharply,” he says.

One of the biggest risks associated

with cryptocurrencies is volatility. Crypto asset values are driven by market sentiment and speculation rather than by fundamentals.

Although they are highly volatile, this is part of their appeal for investors with a higher risk appetite as there is the possibility of higher returns for their portfolios.

Start small and stay invested

“If you are worried that, as you enter the market, the market will crash, decide how much you want to invest in total and then invest 10% of that amount every week (or every month), until your allocation is invested,” Nair advises.

“This strategy, known as dollar cost averaging, will certainly lower your risk if the market drops and gives you more of a handle on the day-to-day intricacies of trading.”

Nair notes the value of long-term investing: “If you track all the graphs over the past five years, you will see that investors who have held their cryptocurrency investment for longer than five years have generated good, long-term returns.

“This means that you should resist the urge to impulsively sell what you have, should the market drop.

“Holding your investment over a long period of time is a great remedy to the volatility. While the major cryptocurrencies may be up or down 5% to 20% on any given day, in the long run, the trend has been upwards.”

Reitz says Luno saw record growth of its customer base last year, with more than nine million users across 40 countries. The number of monthly active customers buying or selling crypto doubled from last year.

“We’re seeing customers hold their crypto for on average of 10 months, compared to an average of just three months in 2017. This is perhaps an indication that we are in the early stages of moving away from pure speculation to some customers seeing longer-term value,” he says.

Eva Crouwel, global head of financial crime at Luno, says that more customers are reporting irregularities more quickly and recognising warning signs as awareness campaigns gain traction.

She warns that cyber-related incidents, such as ransomware and email interceptions, have been on the rise since Covid-19.

“The shift away from being purely office-bound has its perks, but we are seeing significant vulnerability in corporations, which leads to users being tricked into sharing corporate account information or money,” Crouwel says.

Nair advises that you use two or even three-factor authentication where possible when using trading apps and digital wallets.

Reitz says fintech and traditional payment providers have begun to adopt blockchain and crypto solutions, with giants PayPal, Venmo, Mastercard and even Twitter allowing customers to transact in bitcoin. In South Africa, Capitec and Discovery Bank have formed partnerships to list crypto as a new product offering.

Make that first investment, even if it’s just R200… There is no better way to develop your understanding of an investment than to be

in the market