What is a crypto-currency asset?

Crypto assets are digital representations of assets that use cryptography and other technology such as a distributed ledger technology to provide security and other features.

  • They may be a digital representation of another asset such as a dollar or a prepayment for a service, or they may represent nothing at all.
  • The point is that different crypto assets have different objectives and purposes, they can be very different.
  • The block chain technology will definitely feature in our future.

Investing in crypto

Investors in crypto want to make huge gains and we see many are 1st time or inexperienced investors chasing unrealistic returns. There is nothing wrong with chasing returns as long as you:

  • understand the risks, we have seen more losses than gains from investors mainly because they are not working with any investment strategy.
  • invest money you can afford to lose and are prepared to lose.
  • acknowledge the presence of risk and price volatility and exercise caution and common sense.

The following is an excellent summary of the volatility and dangers of crypto.

https://moneysmart.gov.au/investment-warnings/cryptocurrencies 

Bitcoin

The most well-known and first crypto asset that used technology to ‘automate trust’ and remove the need for a middleman, or financial intermediary, between two individuals to complete a trade. Removing the government or banking regulator has attracted many investors to crypto.

  • There is a fixed amount of Bitcoin only so it has a limited supply.
  • Decisions are made on a collective basis i.e. there is no issuer or entity sitting behind Bitcoin.
  • It is still highly volatile like other crypto assets but so far, has maintained its monetary value.
  • It would be wrong to think that other crypto assets will perform like Bitcoin, most crypto assets are very different and whilst cheaper to buy how they perform is not correlated.

Bitcoin’s ride is quite well known:

  • Bitcoin commenced over 10 years ago and individual investors drove Bitcoin to a high in 2017 of $19,000 only to see it fall in 2018 to $4,000.
  • Then Institutional Investors entered and drove Bitcoin to a high in April 2021 of $65,000.
  • This was followed by the emergence of high-profile investors and the inevitable scams to steal investors’ money (these scams preyed on investors by dangling the carrot of achieving unrealistic returns and not missing out on this opportunity).

Why is crypto an attracting investment?

  1. Low interest rates worldwide have investors looking for returns elsewhere.
  2. Both the share and property markets before and during this pandemic have performed very well, but property has a high barrier to entry on the cost and shares don’t have the same allure of the crypto over-night millionaire stories.
  3. Here in Australia many people have spare money to invest because they are spending less, richer from asset growth, and received government stimulus money.

Crypto attracts investors, particularly those relatively new to investing because:

  • It’s easy to invest plus the idea is circulating that a small investment can provide huge returns.
  • Scammers prey on the idea there are easy returns to be made and provide an easy opportunity to invest with their constant adds and marketing on social media.
  • Misinformation and the belief that there is no regulation has some people thinking their wealth is hidden and untraceable, so they don’t have to pay tax.

What is the best way to invest in crypto currency?

  1. Sell and take profit regularly – If you are speculating in volatile markets, it makes sense to:
  • Take some profit out, recoup your initial investment and then regularly lock away your gains.
  • The mistake many investors make is to see unrealistic gains and hold on for even greater returns until they start to lose their money (this is what happens in a price bubble). Unfortunately it is hard to justify the value/worth of many of these investments.
  1. Formulate an investment plan – You don’t have to sell out entirely, instead:
  • You should have an idea or a plan of when and how much you will sell if prices rise or fall.
  • You can talk to Adrian Chaudhary at VJC regarding what strategy would suit your needs.

Signs that this market has too many inexperienced investors and why this looks like a bubble

  1. The risk is obvious, it appears as a warning by reputable providers.
  • I reviewed 3 regulated Australian trading platforms (capital.com, E Toro, Plus 500) and ALL have warnings very clearly you can lose money!
  • These warnings are like those on a cigarette packet, they are displayed with their main offer so you can not miss them. Whilst not legislated they are included to prevent complaints.
  • This warning appears in the footer on the Supercoin website. “Warning: Investing involves high risks, including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors”.
  • They go on to say “64% to 80.5% of retail investor accounts lose money when invest with these provider. You should consider whether you can afford to take the high risk of losing your money”.
  1. Experienced investors know that high returns are correlated with high risk and a guaranteed return does not exist in this type of investment.
  2. Often price volatility is created by inexperienced investors as they speculate the market up with optimism and then drive it down with fear.
  3. The presence of scammers is always a sign that the market is not right as they seek to capitalise on the hype to steal people’s money.
  • Scams increased during the covid-19 period as scammers emailed and called investors to tempt them with amazing returns. While operating online and overseas, it is difficult to distinguish between a legitimate business and a scam.
  • And to add insult to injury the information they acquire from applications can possibly be used for identity fraud also!
  • Sending money overseas comes with the real risk you could also lose your money.

ASIC-sounds-alarm-on-shady-crypto-asset-smsf-offers

  1. A lack of regulation attracts novices, this equates to a lack of safety for the investor as there is no complaints or dispute resolution service and specific laws to prevent unscrupulous behaviour. Whilst many of these investors would not consider investing in a 3rd world country, they don’t see this investment as having similar features.
  2. As this is new technology and difficult for many to really understand and many investors have not realised the risk and lack of protection if a platform fails or is hacked. Recently it was reported that North Korean hackers are very active in this space.

In 2022 we may see safer crypto investments emerge

This year the risk of investing in crypto could be reduced by:

  • Investing via a reputable and well run crypto platform in Australia, because crypto-assets will be considered a financial product under Australian law and hence require the offerer to be licensed by ASIC. When you deal with an Australian Financial Services Licensee, you have access to a free, independent dispute resolution scheme via AFCA. This is better than dealing with an overseas platform which may increase your risk of fraud.
  • Our current research indicates 2022 may see the emergence of quality crypto-assets via more traditional investment products like an ETF or managed fund. We are advised at present there are no good investments but may be later this year. These will provide regulation, reputation and integrity but likely lower and more realistic returns as the market builds real value.

Eventually we will see this technology in our daily life and these investments as part of the mainstream investments, but it may look different to what is out there.

the-asic-podcast/episode-65-crypto-assets-for-first-time-investors/

Contact Adrian Chaudhary at VJC  to discuss your any of your investment queries.

General Advice warning: the information in this article is general in nature, it is not advice specific to your needs. If you want to act upon the information in this article then you should seek advice from a qualified professional. VJC accepts no liability to any party for acting from this information unless they have sought advice in a formal engagement with VJC for this purpose.