Over the last 3 and half years Cryptocurrencies have been getting popular in Africa and South African private investors have taken an interest in them. After the growth in value of bitcoin in 2017 and the news coverage that received many South Africans started investing in cryptos as they were attracted by the high returns. However investing in cryptos has it risks and has brought out some shady characters who are eager to have people part with their money. In this article we are going to be looking at how to actually buy cryptocurrencies and what risks you should know about them.
Let us get the basics out the way...
What are Cryptocurrencies?
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.
The above is a bit of a mouthful so let us break it down to some parts that we lay people can clearly understand and then put it all back together.
Digital/Virtual.. this means that there is no physical coin or paper and that the item exist digitally as computer code that cannot be manipulated because of the use of cryptography which is the art of scrambling writing to the point that it cannot be read unless with a special key which results in security of the content of the code. (This is where the CRYPTO in cryptocurrency comes from).
Counterfeit/Double-Spend... basically its impossible to create fake ones (unlike paper money)
Decentralized Network... there is no central system that monitors and edits the paper trail rather there is a written record of everything that happens that can be accessed by everyone and when the written record does not match what everybody else has it can be rejected by the system. So things like account balances etc cannot be manipulated because the system collectively knows the account balances of everyone unlike in the mainstream banking system.
No Central Authority... there is no government or reserve bank that determines what happens or how much currency there should be so nobody can say "let us print more".
So what does this all mean?
It means that cryptocurrencies are money that is outside the mainstream system that people can use. They are digitally stored to avoid manipulation and can easily be sent or received because there is no middle man (bank/payment system).
Now that we understand what cryptos are, let us look at why we might want to buy them.
There are various and subjective reasons as to why somebody would want to buy cryptos.
Here are a few:
Speculation
Probably the top reason why people are buying cryptos is to speculate on the prices of the various crypto assets. When people believe the price of a crypto is going to increase they buy the crypto with the intent of selling it at a higher price later. This has happened whenever there has been positive news about bitcoin's price growth. more people buying cryptos. Speculating on the price of cryptos has been profitable for the overall investor community but has not been without risk. The price of cryptos can be volatile and entering the market at the incorrect time can lead to pain when the price contracts downwards. After the first major price increase in 2017 bitcoin crashed by over 50% in value and those who entered at the $19 000 mark suffered heavy losses.
A key thing to understand is that people want to speculate on the price of cryptos and this will affect the prices of cryptos. As more and more people enter the crypto market we will see more price increases and more volatility as people take their profits by selling at various price levels.
Safe-Haven/Store of Value.
There is a growing amount of people who see cryptos such as bitcoin and etherium as better storages of value. This means people buy cryptos with the hope that they hold their value better than fiat money. Fiat money loses value over time due to inflation and the loss of purchasing power. People believe since cryptos are not controlled by governments they will be able to serve as reliable and stable storages of value . During 2020 Bitcoin acted as a hedge against the traditional money markets and financial markets, a role that has traditionally been seen as Gold's and Silver's. It is impossible to know if this trend will remain into the future as cryptos can be extremely volatile which does not make them ideal instruments for storing value in the short term.
Online Shopping.
People are buying cryptos so that they can use them to transact online. Cryptos make transacting online easier and more affordable for people. This was after all the initial reason most exist, to be used to transact online. Various online merchants have started accepting Bitcoin, Ether and Ripple(XRP) in their stores. Payment providers such as PayPal have also started opening up to Bitcoin and many others will follow suite. In South Africa Payfast already enables merchants to accept Bitcoin as a form of payment.
Future Protection.
Cryptos are here to stay but not all of them will still be around in the future. In my opinion the space will consolidate to a few, possibly 10 and 3 will be dominant. These dominant cryptos will be the default way to transact in the world as more and more activities become online. Thus people buy cryptos as a way to protect their current wealth by owning the money of the future today. This also puts people's money out of government control and influence. A factor that is beginning to be attractive for many people looking to escape government incompetency.
As you can see from the above there are numerous reasons why people buy cryptocurrencies. The important thing is that you have to follow your own reasons as those will determine how you approach cryptos. This is where doing your own research becomes important. Once you have figured your reasons the next important thing to know is what are your risks....
what are the risks?
Regulators.
The crypto market use to resemble the wild wild west. There were no rules and regulations.
This was at a time where they were seen as a passing fad and hype. Now cryptos are considered as a possible alternative to the traditional financial system. This has drawn the attention of regulators. The possible regulations are the first risk that crypto investors should be aware of. In a stroke of the pen governments can make cryptos illegal and this would stop the fun for most investors. Countries such as Algeria, Bolivia, Ecuador, Bangladesh, Nepal and Macedonia have banned cryptocurrencies. So it is possible for your respective country to ban them. Restrictive regulations are also possible such as only allowing central banks to issue and control cryptos (which would defeat the purpose of decentralized finance). Thus its important to research the possible global regulations and the local ones. If you are interested in reading some details about regulations click here.
The SARB (South African Reserve Bank), SARS (South African Revenue Service) and the FSCA (Financial Services Conduct Authority) are the three major regulators to pay attention to. The National Treasury as well is a good source to monitor what governments thoughts are. The biggest fear for the South African government is people using cryptos to evade tax payments and using them instead of the Rand as inflation hits the Rand. So expect regulations to emphasize controlling and keeping track of people. For the purposes of taxation cryptos are already referred to as Digital Assets and are taxable by SARS. The good thing is that we don't see them being outlawed by the government and that is a good thing.
Another risk to be aware of is Cultural Changes.
Cryptos themselves represent a shift in society but they are also at risk of disruptions. The cryptos you invest in may be disrupted by a new and competing crypto especially when the coins have the same usage. This is something to be aware of so its important to pay attention to the purpose of your coin. Do not be lazy, read the whitepapers that set out the goals of the coin creators. This will tell you what future to expect and how people might behave in the future.
Basically the biggest risk in the crypto market is Changes, it is important to be aware of the various possible changes that affect coins. Right now the market is performing the way it is because of current rules (or lack of) and human behavior. If changes come they may be good or bad.
So you now know what cryptocurrencies are, you know your reasons to invest or buy them and are aware of the risks, how can you buy them?
How to Buy Cryptocurrencies?
There are various ways to buy, store and sell cryptocurrencies. I am going to tell you about the two ways that I use which in my opinion are the easiest and safest ways, depending on your goals. These two ways are:
Crypto Exchanges.
Bundle Coins
Crypto Exchanges.
A cryptocurrency exchange, or a digital currency exchange, is a business that allows customers to trade cryptocurrencies or digital currencies for other assets, such as conventional fiat money or other digital currencies.
Not all coins are available at a single exchange, in fact not all exchanges are equal and trade the same coins. Most exchanges will have the top 5 coins and other alternative coins. Exchanges are located in various parts of the world and can serve different geographical areas. The key thing when selecting an exchange is to choose one with a high trust rating, offers a decent price for your assets and most importantly can protest your assets from fraud even against itself. There have been exchanges in the past that have been hacked and thus lost peoples hard earned money so its important that you choose an exchange that does not put you at risk.
The first exchange and wallet that I used was Luno, Luno is a South African company(that's gone global) and their trust ratings are very high. I recommend Luno for those who are starting out in the crypto space. The Luno exchange is accessed via a mobile app or web browser. Both are user friendly and straight forward to navigate. The ease of use is why I started with Luno to buy, sell and store my cryptocurrencies. Their platform can be linked to your local bank account and the security is high quality. Deposits are easy yet a bit slow unless you pay for the instant deposit service and withdrawals are reasonably fast. Furthermore they offer a crypto savings account which earns interest in bitcoin (pretty cool). My only problem with Luno has been that they do not have a direct support line and online chat service which can be annoying when you want to reach them instantly for assistance. Their email support is not however bad and I have used it with positive results. Another drawback of Luno is that they only offer access to Bitcoin, Ether, XRP, Bitcoin Cash and Litecoin, meaning you won't have access to all the other cryptos. This for me is fine as it is my belief that eventually the crypto space will consolidate to just the top 5 or 10 cryptos.
However I don't know which Cryptos will eventually come out on top. Once I felt confident in my knowledge of Cryptos I moved my holding to Coinbase. The reason I moved to Coinbase is because they offered a lot more cryptos which meant I could expand my Crypto portfolio.
Coinbase is based in San Francisco and is one of the most trusted exchanges in the world. They offer an extensive list of coins to trade and use (more than 30). I recommend it for people who know what they are doing as the amount of cryptos available could overwhelm the novice. Like all wallet exchanges Coinbase enables you to buy, sell and store cryptos and be able to spend them on the go. Opening an account is easy. You download their app or go to the web version, enter email address, cellphone number and once the account is open you verify your ID using your Passport, Drivers License or ID Card.
Bundle (EC10 Token)
The EC10 Token was the first way I ever invested in Cryptocurrencies, I discovered them online and bought a few. At the time I did not know much about cryptos and just wanted to be part of the action. Sadly I sold my tokens at the wrong time and lost a bit of money. Had I waited 3 months I would have had some solid gains.
If you want to invest in multiple cryptocurrencies in a single transaction, then the EC10 Token might be the best thing for you. The EC10 token is a crypto token linked to the value of the EC10 Index which is an index that tracks and holds the top 10 cryptocurrencies. So if you buy 1 EC10 token you automatically invest in the top 10 cryptocurrencies which is pretty cool. The only challenge with this arrangement is that you cannot use your EC10 as money, it really functions more like an ETF and serves to be a vehicle for investing and speculating on the price of cryptocurrencies. The token has grown in value since its inception and so has proven to be a great way for investing. You can buy yours at Easy Equities.
My final thoughts...
We don't know what the future holds, anything is possible. The best way to prepare for the future is to keep track of all possibilities. Cryptos are here to stay and will be part of the future. Whether they will be under the control of people or governments is up for debate.
The only thing we can do is invest and manage risk. In the end it is what serves people the best that will win and I guess that is all that matters.
Happy Investing
-Omega
Remember: Opinions expressed in this article do not and never will constitute financial advice. Every persons financial situation is different, I recommend you speak to a financial adviser about yours.
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