If you invest in cryptocurrency, do it based on the facts, not hype

IF YOU invest in cryptocurrency, do it based on the facts, not hype. And there is a lot of hype. So before you start buying and selling Bitcoin, the biggest cryptocurrency in the world by market capitalisation, know the risk and rewards, so you can make an educated decision on whether investing in digital gold is a good idea for you and your personal finances.

It was a slow start to October, though most major cryptocurrencies, including Bitcoin and Ethereum, were all up over the last week. Bitcoin is changing hands for more than $20 000 (about R354 800), with Ethereum, the second-largest cryptocurrency by market value, is also up, trading at around $1 353, according to Luno, a local crypto outfit. The total capitalisation of the entire cryptocurrency market at time of writing was $966.732 billion.

Although it may not have seemed like it at times, September was a relatively good month for Bitcoin, Luno states.

“The largest cryptocurrency by market-value outperformed the stock market in a period marked by macroeconomic turmoil.”

Only gold held its value relatively well, falling by 3%, in alignment with Bitcoin’s performance. Bitcoin’s correlation to gold now sits close to its highest level since 2020. This is after cryptocurrencies including Bitcoin took a huge plunge in 2022.

Does the recent recovery mean the digital gold narrative is back? Probably, but only in the short term.

Hannes Wessels, country head: Binance South Africa, says in a media release that, “While well-considered investment in many types of crypto has the potential to augment the value of many portfolios, the most significant impact of cryptocurrency in the years ahead is likely to come from the steadily increasing acceptance of its function as a decentralised finance solution.” This is especially true in the

African context, where the acceptance of cryptocurrency as a way of making and receiving day-to-day payments for goods and services is steadily gaining momentum.

A June 2022 policy brief by the United Nations Conference on Trade and Development showed that between 7% and 9% of people in South Africa, Kenya and Nigeria are now regularly using digital currencies as a way to pay. The recent adoption of crypto as legal tender by the Central African Republic points to the fact that digital currencies are not just gaining acceptance among the general public; their potential for economic transformation is also increasingly being recognised by African governments.

Wessels says that against this backdrop, the potential for digital currencies to not only transform lives and businesses but also underpin the development of entire economies cannot be underestimated.

“There are too many proof points of this potential to mention, but for example, crypto allows families of migrant workers to receive money transfers far quicker, and at a higher value, thanks to fees of around 0.1% per transaction versus the 3% to 5% they’re currently paying.”

GlobalData’s 2022 Financial Services Consumer Survey revealed that consumers around the world are showing interest in the cryptocurrency sector. This interest is primarily driven by the motivation to use cryptocurrency as an investment instrument; and 77.4% of global respondents who reported having cryptocurrency said they were motivated to earn profits from it, while only 18.5% of respondents reported using it as a payment tool.

“Of course, the value of digital currencies to Africa’s economic development is certainly not limited to their use as a currency,” Wessels says. “As crypto gains acceptance as an institutional investment vehicle, it will undoubtedly become an increasingly important and valuable component of most institutional investment structures, from retirement funds to various public sector investment vehicles.”

The crypto sector has gathered a lot of interest from consumers and institutional investors since the pandemic. PWC’s 4th Annual Global Crypto Hedge Fund Report 2022 noted that the assets under management (AUM) of crypto hedge funds surveyed was $4.1bn in 2021, 8% higher than the previous year. Though hedge funds are taking exposure to the crypto market, they are limiting their exposure, as approximately 57% of hedge funds investing in crypto have less than 1% of the total AUM invested in the sector.

The high volatility of the sector makes cryptocurrency a risky asset in which to invest. One of the main strategies that hedge funds are adopting with cryptocurrencies is a marketneutral strategy, which aims to generate profit no matter the direction of the market by mitigating risk through the use of derivative products.

Last month, Nasdaq, the world’s second-largest stock exchange, announced it would offer custody services for Bitcoin and Ether to institutional investors.

But the Financial Services Conduct Authority have on many occasion emphasised that “crypto-related investments are currently not regulated by the FSCA or any other body in South Africa” – and that consumers and investors should tread lightly.

With crypto assets being volatile and regulation not being formally imposed yet, it is important that the crypto asset owner is equipped with the correct information to protect their assets from theft, according to Tax Consulting South Africa.

“Crypto assets need to be treated with the same security measures as a personal bank account,” they say.

Just as a bank account has a security PIN that needs to always be kept private, a crypto asset account has an encryption key, and most crypto asset platforms offer an Application Programme Interface key (API key).

These keys should be kept private as well. “Clients should avoid giving out their API keys and if they are going to give it to someone, then it should be set to ‘read-only’. When you are generating your API key, you can filter the rights for that key generated. It is very seldom that someone is going to ask for your API key and if they do, then the client needs to be very wary of it and never be afraid to question it,” they say.

The crypto asset owner needs to remember that if it sounds too good to be true, then it usually is. Therefore, crypto asset owners should do their research on companies that want to manage their accounts, and make sure that the company is registered with the FSCA.

Another red flag that crypto asset owners need to be wary of is when a company offers exponential growth and returns. “If companies are offering you 5% growth per day, that’s a bad sign. Even if companies are offering 1% to 2% growth per day it should be heavily scrutinised, because such growth in cryptocurrency is difficult to achieve,” says Tax Consultancy SA.”

If you are unsure about how to proceed with your crypto assets, then it is in your best interest to consult specialist tax practitioners, attorneys or registered financial advisers who have expert knowledge in crypto assets, to obtain correct advice on how to manage such assets.