How to invest in cryptocurrencies?
Cryptocurrencies, especially bitcoins have gained prominence as an asset class and a popular investment option in the last couple of years. Many advanced nations such as the US, the UK, Canada and Australia have recognised cryptocurrencies. In this blog, we have covered aspects using which an individual can buy and sell cryptocurrencies, know about the popular exchanges that provide facilities for trading and the risks involved in the investment.
How to buy and sell cryptocurrencies (majorly bitcoins)?
There are three methods through which cryptocurrencies can be bought/stored and sold: Online platforms of various exchanges/from the exchange offices; bitcoin ATMs; and transactions between two parties without the need of an exchange.
Online platforms
Buying and selling cryptocurrencies through exchanges is probably the most popular and the less risky method available till now. There are a number of exchanges that allow trading of cryptocurrencies online.
How to buy?
1. Choose a cryptocurrency exchange. 2. Trade with your local currency, or USD (if local currency is not accepted by the exchange) in terms of the cryptocurrency. 3. Payments can be made by linking the bank account, credit/debit cards, or other payment tools such as Paypal. Online exchanges have a wide variety of payment options in order to lure customers. 4. Once the transaction is completed, bitcoins are transferred to your account registered with the exchange. There is no settlement cycle followed owing to which cryptocurrencies sometimes take longer time to be credited to your account. 5.Most exchanges charge a fee on fixed/ percentage basis for each transaction. 6.Move your bitcoins into a secure Bitcoin wallet which can be used to store the value in an encrypted manner. Bitcoin wallets contain private keys; secret codes that allow you to spend/sell your bitcoins. These private keys are stored in reality, not the bitcoins. They help in secure transactions.
How to sell?
1. Bitcoins available in the wallet can be sold through the exchanges at spot rate. 2.Once the sell transaction is completed, the exchange finalises the transaction by transferring the amount to the linked bank account. 3. Sell transactions are also honored by the exchanges after charging a commission/fee. In the case of the GCC, Al Mal Capital in UAE offers access to buy and sell bitcoins to its clients.
Bitcoin ATMs
A bitcoin ATM is an internet machine that allows a person to exchange bitcoins and cash. Some bitcoin ATMs offer bi-directional functionality (both buying and selling is allowed). In some cases, bitcoin ATM providers require users to have an existing account in order to transact on the machine. Bitcoin ATMs are the most private way of obtaining them, as the purchaser in general does not require to furnish any details. However, some bitcoin ATMs now require users to register themselves with the service providers.
There are 1,369 bitcoin ATMs installed across 56 countries in the world. In GCC, there is a buy-only bitcoin ATM in Jubail International Market. Most of the ATMs are located in US, Canada and Europe. There are online websites and mobile apps that help to find out the bitcoin ATMs across the world. Each ATM has its own transaction limit and permissible currency that can be used for the transaction.
Bitcoin ATM machines collect cash (usually local currency or USD) and in exchange provide equivalent bitcoins. Bitcoins are dispensed either to the buyer’s own bitcoin wallet (via scanned QR code on the buyer’s mobile device or paper wallet), or to a paper wallet generated and printed by the ATM at the time of purchase. In some ATMs, bitcoins can be deposited and cash can be collected in return.
Genesis, BitAccess and Robocoin are some of the popular bitcoin ATMs. All these ATMs charge a service fee every transaction.
Direct buying and selling
Though a rare mechanism in use, it is possible to transfer bitcoins to other persons directly for a price. As cryptocurrencies are not regulated, such direct buying and selling without the need for exchanges can happen. It is anticipated that such transactions could be popular among those using cryptocurrencies as these exchanges do not offer any counter party risk either. The only advantage of using the exchanges in place of direct transaction is the reputation they have earned in the past, due to which exchanges are perceived to be less riskier compared to one-to-one transactions.
Risks involved
Not only are cryptocurrencies risky due to their volatile nature, the nascent stages of its development, the lack of clarity on who’s who as in the case of bitcoins and many other cryptocurrencies are some other major risks that are inherent. Few countries such as the US, Canada, Australia and the UK have legalised use of cryptocurrencies. However, they remain outside the purview of regulations for their transactions and exchange operations. The chance of default, dishonor of payments and insolvency is high for the trading parties and exchanges.
Apart from the above mentioned risks, there have been allegations of misuse of bitcoins for illegal purposes. As most nations are compliant to treaties such as anti-money laundering and are a part of Financial Action task force (FATF), there is possibility that nations may take the direction against cryptocurrencies provided allegations are proved.
Cryptocurrencies offer a highyielding and attractive investment option for investors in GCC and elsewhere, despite the bundle of risks associated. We recommend investors to read the risks section of this blog carefully before investing in cryptocurrencies! The writer is the managing director of Marmore Mena Intelligence. Views expressed are his own and do not reflect the newspaper’s policy.