How not to invest in cryptocurrency

In New Zealand, you can buy and sell cryptocurrency through exchanges such as Easy Crypto or Swyftx. Essentially you create an account, deposit your real money, place an order to buy or sell, and store your cryptocurrency in a digital wallet. You can store it in a ‘hot’ wallet provided by the exchange or use a separate hardware or software ‘cold’ wallet for more security. You would use the same exchange to sell your crypto, either for other virtual coins or for dollars.

Um, you don’t. Well, not in the true sense of investing, anyhow. The idea when you invest is to buy assets that can ‘return’ money to you, thanks to the future income they produce. For example, you buy shares in companies that make profits, which then pay dividends back to shareholders. Cryptocurrency, since it typically has no future income to measure, is essentially a punt – it’s speculation and not investing. Which makes it more like gaming, gambling or… guessing. Guessing whether it will go up in value or not, and whether there will be someone else down the line to pay more for it when you want to sell your coins.

Coins and tokens are two types of crypto. Bitcoin, the first cryptocurrency to take off, is a typical example of a coin, and most of the cryptocurrencies we think of are coins. But there are also tokens, like NFTs, which can represent another asset such as a piece of art or even property.

Altcoins are different from Bitcoin, which was originally intended mostly as a currency to buy things with. While these altcoins can be bought and sold like any coin, they are made to do many other things instead. An altcoin example is Ethereum, which lets users run applications on its blockchain and host smart contracts.

Stablecoins are cryptocurrencies whose value is tied to the value of another asset, such as the US dollar. If functioning correctly, one stablecoin pegged to the US dollar should always be worth $1, for instance. (But they don’t always function as intended.)

This is a good question, because it’s not always clear what you’re buying when you purchase a non-fungible token or NFT. ‘Non-fungible’ means this digital token can’t be exchanged for another (unlike a coin, which can be switched with another of equal value without worry). They’re unique and can’t be replicated. NFTs are bought and sold, and can represent either digital stuff – like a digital design or a video – or real-world stuff – like a painting itself. If you buy the NFT, the art is yours. (Hopefully!) Their value is often based on celebrity hype.

The security of cryptocurrencies is based both on the cryptography, which keeps a coin from being copied or spent over and over, and on the underlying blockchain technology, which automatically keeps an unchangeable record that can be verified by a network of computers.

Not having to trust a single entity, like a bank, to keep track of everything and get it right seems to offer more security. However, there are still big players in this space, particularly the cryptocurrency exchanges, which unfortunately have repeatedly been targets of fraudsters – both from outside and inside the exchanges themselves.

And because these crypto-economies are so new, there are too many ways to lose your money which have not yet been plugged by regulations and laws. You’ll want to take steps to make sure your money and coins are secure. Stay safe out there!

Here are our top 10 risks when it comes to cryptocurrency:

1. The value of your cryptocurrency suddenly falls steeply – or is wiped out completely.
2. Your cryptocurrency, if not stored properly, gets stolen by a hack, theft or scam.
3. You gear up and borrow money to buy cryptocurrency, but when the price falls, you are left on the hook and need to pay back much more money than anticipated.
4. The government changes the rules, which affects the value of your cryptocurrency. Or it bans it outright.
5. The technology is still in early stage and may contain coding mistakes or weak networks that can be hacked.
6. You have little legal protection in this unregulated space from hacks, disputes or investment scams.
7. The price of your cryptocurrency is affected by market factors, such as how other investors feel about crypto, supply and demand, the economy, and generally what’s going on in the world politically.
8. The exchange you trade on can be hacked, experience other technical challenges, or even go out of business.
9. Especially when the price of cryptocurrencies is swinging wildly, it may be difficult for you to sell your cryptocurrency in a hurry to someone else. This means your money in crypto is pretty much locked up, unfortunately.
10. The value of your cryptocurrency tanks for other unforeseen reasons. There’s really not much underpinning the value of many cryptocurrencies and tokens. People are speculating that they will continue to be worth something, which is okay… until they aren’t worth anything.