Cryptocurrency 101 – all you need to know

The simplest explanation is that cryptocurrency is a digital asset (something that has value and only exists digitally). Picture: Independent Newspapers

The simplest explanation is that cryptocurrency is a digital asset (something that has value and only exists digitally). Picture: Independent Newspapers

Published Jan 16, 2024


By Christo de Wit

THE Bitcoin price has been rallying, and this positively impacts the prices of many of the cryptocurrencies. Bitcoin has rebounded over 170% this year, beating most investments.

What is cryptocurrency?

The simplest explanation is that cryptocurrency is a digital asset (something that has value and only exists digitally).

With cryptocurrency, you only need an internet connection and a computer or smartphone to be able to send or receive money from anyone, so it’s the world’s first globally accessible type of money.

Cryptocurrencies are a true paradigm shift. They enable us to reimagine the financial system, to upgrade the world to something better: money that can be moved around cheaper, faster, and safer, cutting out unnecessary intermediaries and ensuring that consumers benefit instead.

Bitcoin functions as a payment system, similar to bank transfers or credit cards. Like gold, it can be used as money, except it is much easier to move. Finally, Bitcoin is like the internet in that no single person or entity controls it.

Is cryptocurrency for the fringe?

Over time, Bitcoin should become less volatile as there is increased liquidity and market acceptance.

We encourage responsible investing which includes never investing in something you don’t understand and never spending more on speculative cryptocurrencies than you can afford to lose. Although there are many cryptocurrencies, they do not all have solid fundamentals. For this reason, we substantially limit the cryptocurrencies available on Luno to those that have been rigorously reviewed.

We also encourage the regulation of cryptocurrency and have worked closely with several South African regulators as they formulate appropriate regulations for the industry. The Financial Services Conduct Authority (FSCA) classified crypto assets as financial products, and consequently, crypto asset service providers were required to apply for a licence this year.

How is the price of Bitcoin calculated?

The price of Bitcoin is based on supply and demand, the price a buyer and seller agree upon.

Other currencies and many investments also work like this. While you observe your currency as stable, its value continuously changes. When you want to exchange it for another currency at a currency desk, the price fluctuates. Bitcoin works in the same way.

A key differentiator of Bitcoin is that there is a finite supply. Once the 21 million in existence are in circulation, Bitcoin cannot be reproduced, nor can more currency be printed as with hard currency. A total of 93% have already been mined.

How much do I buy?

The same intuitive rules that apply to traditional money also apply to Bitcoin: don’t invest more than you can afford to lose, and don’t put all your eggs in one basket.

Start small - you don’t need to buy a whole Bitcoin currently valued at about R810,000; you can invest from as little as R20.

With more than 10 000 cryptocurrencies in existence, you need to use credible exchanges that offer only cryptocurrencies they have carefully evaluated, similar to how you would buy shares online.

Cryptocurrencies are still relatively new and therefore very volatile - prices can go up and drop quickly. You can learn more about cryptocurrencies by visiting Luno’s free learning portal. Be wary of any scheme that promises a guaranteed return on investment.

How to avoid falling victim to crypto scammers

  • Don’t be fooled by jargon designed to make you think the person has some special knowledge or ability related to crypto. Many people are still learning about crypto, and they take advantage of this.
  • Never send money to people you meet online, and when you are being pressured you should be extra wary.
  • Until licences are issued in SA, avoid brokers, account managers, traders, sponsors, agents, and other people that offer to trade cryptocurrency on your behalf.
  • Never share personal details, such as login details, ID numbers, account numbers, or passwords.
  • If it feels suspicious, stop communications immediately by blocking the person on all your social media platforms.

* De Wit is Luno’s country manager for South Africa.