Should I invest in Bitcoin or other cryptocurrencies?

What are cryptocurrencies?

Cryptocurrency is a type of money that’s digital and can be used to buy and sell things, usually online.  However, its potential to store and grow value in has resulted in interest from investors looking for other ways of earning income faster.

The New Zealand Financial Markets Authority website notes cryptocurrencies are not legal tender (money that must be accepted as payment) in most countries and do not exist physically as notes and coins. They are also not viewed as financial products so are not regulated in New Zealand. There are over thousands of different cryptocurrencies available on the internet, with Bitcoin one of the more well-known currencies.

When you buy cryptocurrency, it is held in a ‘digital wallet’. It can be used to buy goods or services from anyone willing to accept it. Cryptocurrency trading platforms enable you to buy and sell cryptocurrency and some allow you to convert it back into money (like New Zealand dollars) at any time, if someone is willing to buy it.

People buy or use cryptocurrencies to:

  1. make a profit if the cryptocurrency increases in value,
  2. make payments directly without going through the banking system,
  3. benefit from lower (usually zero) transaction fees compared with traditional banks and other online payment processes when purchasing goods and services,
  4. invest in a business or individual raising money through an Initial Coin Offer (ICO).

Understanding the risks

Banks charge fees when you are making payments overseas, so cryptocurrencies are seen as a cheaper option.  However, many overseas cryptocurrency exchanges are unregulated and operate exclusively online – with no connection to New Zealand.  This makes it hard to find out who is offering, exchanging, buying or selling it. It also makes it unlikely you’ll recover your money if things do go wrong with your overseas payment.

Using cryptocurrencies may make you a target for scammers or businesses selling high-risk investments.

Things to look out for

Cryptocurrency value can change quickly

There many cryptocurrencies available. If one becomes popular its value may increase quickly, but its value can also suddenly drop, sometimes permanently.

The risk increases if you invest in the futures market through contracts for differences where you make (or lose) money by predicting how the price of cryptocurrencies might change. These products are typically offered with leverage (the use of debt) – you may only pay a portion of the value of your trade upfront but if you lose, you have to repay the full amount borrowed, plus any amount you’ve lost. Even small movements in currency values can have a big impact on any gains or losses you make.

Your ‘coins’ may be stolen

All online transactions are at risk of cyber-crime. The cryptocurrency in your digital wallet can be stolen just like the money in your real wallet – with very little chance of it being returned. Cryptocurrency marketplaces and trading platforms can also be at risk of cyber-attack.

CERT NZ has some great information on ways you can keep your digital wallet more secure.

Cryptocurrencies aren’t widely accepted

Cryptocurrencies have less practical value than money which can be used to buy all goods and services.

Make sure any New Zealand platform you use:

  1. is registered on the Financial Service Providers Register (FSPR),
  2. is a member of a dispute resolution scheme, and
  3. holds your New Zealand dollars in a trust account.

Know what you’re getting into, including how the currency is stored and transferred, and how to get your money back.

Store your login details securely. If you forget them or enter your details incorrectly, you may not be able to access your money permanently.

Understand how to access a payment record. You may need to prove you’ve made a payment – to get a refund for example.

What does the Bible say about investing? 

 “Don’t wear yourself out trying to get rich.  Be wise enough when to quit.  In the blink of an eye wealth disappears, for it will sprout wings and fly away like and eagle.” (Proverbs 23:4-5 NLT)

 “Teach those who are rich in this world not to be proud and not to trust in their money, which is so unreliable.  Their trust should be in God, who richly gives us all we need for our enjoyment.  Tell them to use their money to do good.  They should be rich in good works and generous to those in need, always being ready to share with others.  By doing this they will be storing up their treasure as a good foundation for the future so that they may experience true life.” (1 Timothy 6:17-19 NLT)

There are better, more stable opportunities for investing. If you think you want to own a cryptocurrency, start small, and be prepared to lose it all.

Acknowledgement – a significant portion of the content of this article was sourced from the New Zealand Financial Markets Authority website.  For further information on cryptocurrencies and warnings issued by the FMA go to www.fma.govt.nz.

Peter Crawford

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