How to minimise risk when investing in digital assets
Cryptocurrencies have exploded on to the national and worldwide scene, with a growing number of retail and institutional investors increasing their exposure to them.
While awareness of cryptocurrencies is growing, many investors remain at best cautious and at worst outright sceptical about the growth potential and security of this investment vehicle.
However, cryptocurrencies can be a lucrative way to invest, provided you follow certain principles.
The greatest concern is that most governments have not formed coherent fiscal policies for the technology, which makes investors skittish that the trading rules, outright legality or taxation status may change over night. It is, however, unlikely that these matters will take effect in South Africa.
The South African Reserve Bank has issued a consultation paper earlier this year, calling for stricter regulation of cryptocurrencies, citing the risk to the public of dealing in an unregulated financial product. Encouragingly, the paper stated that South Africa does not intend to ban buying, selling, holding or making payments with crypto assets.
It also stated that any increase in regulation pertaining to cryptocurrencies would be carried out in a phased and dynamic manner - suggesting that there won’t be any radical overnight changes.
The status of regulation in South Africa aside, investors should exercise healthy caution when considering a cryptocurrency purchase.
The following steps should be taken when investing in cryptocurrency:
* Be informed. Don't enter the cryptocurrency market without really understanding what you are doing. Cryptocurrencies are complex, but the internet has a wealth of information to help you understand exactly how it all works and how to buy into it. As with any other investment, it is vital that you know what you are doing and read all the fine print. The trading environment is completely new to most investors, so be sure you understand how to buy and offload your assets.
* Find a reputable cryptocurrency provider. In August 2018, there were 1800 recorded cryptocurrencies. It's unlikely that all of these will continue to grow and evolve in the coming years. Other than Bitcoin, some of the well-known or best-performing currencies include Ethereum, Ripple, EOS and Bitcoin Cash. But you may want to invest in a lesser known currency with greater growth potential. Make sure you have a good reason for why you are going with the cryptocurrency of your choice.
* Take responsibility for your asset's security. Just like any other asset, cryptocurrencies are vulnerable to theft. As cryptocurrency is digital and decentralised, there is no central bank or broker that you can turn to if your money is accessed by an unauthorised party. You will have a private key (a piece of code) that gives you access to your investment, so this is what you must keep safe. Your cryptocurrency exchange will provide many layers of security to prevent a breach from occurring. The best way to keep your money safe is to keep your private key in a “cold storage wallet”, which is not connected to the internet.
Gavin Smith is the head of Africa at deVere Acuma.