Cryptocurrencies – Bitcoin, Ethereum, Litecoin, etc. – have been in the spotlight globally and locally in the past few months. Moneysmart.as states that “today, there are hundreds of digitally created currencies, as well as Initial Coin Offerings, or ICOs, which are like initial share offers to the public, giving you an opportunity to acquire the asset at the lowest possible price… Then there are utility tokens like Ethereum, with specific purposes.”
While crypto assets have earned a place in many portfolios, these are things you should consider before you invest.
The popularity of cryptocurrency is very attractive to scamsters. In a scam earlier this year, a website and social media communication made fake claims DubaiCoin – a currency that has been in circulation for a while – is intended to be used in place of cash. The hype led to investors queuing up to buy it, leading its value to shoot up by over 1,000% to USD 1.13, instead of its usual USD 0.1. There is such a thing as DubaiCoin, but it is not the official currency anywhere
Investments, even virtual ones, are real-world things and are impacted by real-world events. In June this year, Bitcoin and other currencies saw their values plunge by as much as 8% because of China’s efforts to rein in the country’s cryptocurrency industry (it is home to over half of the world’s bitcoin producers) by ordering people to shut down Bitcoin “mines” – basically people using computational power (and electricity) to create new Bitcoins.
The short answer is that it depends, as in some countries or regions Bitcoin mining is legal, but it is outlawed in other places. You should be aware that:
Bitcoin, the cryptocurrency, is not regulated by a central bank and is not printed — it is computer-generated via mining.
Despite its use for buying goods and services, there are still no uniform international laws that regulate bitcoin.
Many major and developed countries allow the use of bitcoin, such as the U.S., Canada, the EU, and the U.K.
There are countries are wary of the use of cryptocurrency because of its volatility, decentralised nature, perceived threat to current monetary systems, and links to illicit activities like drug trafficking and money laundering. Some nations have outright banned digital currency, while others have tried to cut off any support from the banking and financial system essential for its trading and use. In China, for example, Bitcoin is essentially banned in China. All banks and other financial institutions like payment processors are prohibited from transacting or dealing in bitcoin. Cryptocurrency exchanges are banned.
According to the MFSA, Malta introduced the the Virtual Financial Assets Framework to support the innovation and new technologies for financial services in the area of crypto-assets whilst ensuring effective investor protection, financial market integrity and financial stability.
Generation Z, or Zoomers and Millennials are avid investors in cryptocurrency because it uses their language. For instance, a ‘meme stock’ means a trending stock and ‘ape’ is a bullish retail investor.
A June CBC research showed:
- Nearly half of millennial millionaires have at least 25% of their wealth in cryptocurrencies.
- The results highlight a new generational divide in wealth creation from crypto, with younger investors able to earn vast fortunes from the surge in the prices of bitcoin, ether and other digital currencies.
- The importance of crypto to young millionaires could shift the wealth management industry, as private banks, brokers and wealth management firms scramble to cater to a new, crypto-heavy clientele.
A March 2021 research by the Financial Conduct Authority in the UK reveals there a new, younger, more diverse group of consumers getting involved in higher risk investments such is cryptocurrency, is potentially prompted in part by the accessibility offered by new investment apps.
The research found that for many investors, emotions and feelings such as enjoying the thrill of investing in such investment products, and social factors like the status that comes from a sense of ownership in the companies they invest in, were key reasons behind their decisions to invest. The FCA warned that thrill-seeking young investors are taking huge financial risks when investing in high-risk products like cryptocurrencies and foreign exchange trading, with high confidence and little knowledge.
It is to be noted that in national financial literacy survey which ĠEMMA carried out in 2018, based on the OECD / INFE questionnaire, the overall number of persons who invested or saved money over the previous 12 months was very low – 2.3%. The age cohort that ranked highest in investing or saving in cryptocurrencies was the 20-29 – at 5.6%. The table below presents the respondents who answer positive to investing or saving in cryptocurrencies by age.
An article in June on NextAdvisor (https://time.com/nextadvisor) states that today you can buy more things than ever with cryptocurrency these days, from video games to new furniture. It recommends that you should never use cryptocurrency as a means of payment as cryptocurrency markets are notoriously volatile, and the price you pay for an item today may not be what your purchase is worth tomorrow.
Plus, many companies experimenting with crypto payments only accept Bitcoin, which experts say is one of the worst cryptos you could choose to pay for something.
Before investing, whether in cryptocurrency, or, for the matter, any other form of investment instrument ĠEMMA advises that you should:
- Check regulatory approvals.
- Verify contact details of the company and profiles of managers and promoters.
- Keep track of real-world events that affect your investment.
- Despite its increasing popularity, even the most established cryptocurrency is only speculation, with little real-world use, making it a high-risk investment.
- Learn about investing basics – only a small percentage of your portfolio needs to be high-risk. Diversify!
This post is based on a post titled Cryptocurrencies: spot red flags before investing ! by moneysmart (www.moneysmart.ae).