Cryptocurrency - read before you invest

Investing in cryptocurrency is all the rage, with literally thousands of crypto products popping up on social media. People are often tempted to invest, as less scrupulous crypto purveyors and influencers promise instant wealth.

The Financial Sector Conduct Authority (FSCA) has warned that crypto-related investments are not regulated in South Africa, and investors can easily lose their money without any chance of recovering it.

We investigate the crypto investment landscape, whether it’s possible to invest safely in cryptocurrencies, and red flags for potential investors.

Tip: Listen to our recent podcast, Crypto 101, here.

What are crypto assets?

Crypto assets take the form of digital money, the value of which isn’t backed by a central bank or government. This means that their value largely depends on market sentiment – meaning, how buyers and sellers feel about it at any given time.

“Bitcoin, the crypto asset most of us know, is very volatile,” says Gustav Neethling, director of WealthPro.

“Bitcoin investors doubled their money in November last year, but over the past year, its price in rands has been down almost 2%. There have been huge price movements in a single day – up to 30%, for example, and this has led to people speculating on the currency.”

Farzam Ehsani, CEO of digital trading platform VALR, explains, “The cryptocurrency industry is in its teens and, like a human teenager, it’s full of vigour, tumult and experimentation. While cryptos hold tremendous potential for the future of humanity’s financial system, it’s still early days, so I anticipate the current volatility to continue.”

Neethling notes, however, that crypto assets are set to be regulated in South Africa, which will make them a safer choice for investors.

“I believe they’ll be deemed a fifth asset class in which to invest, alongside equities (shares in a company), property, government bonds and cash,” he predicts.

Should I invest?

Because crypto assets are extremely volatile, it’s important to understand your risk profile before investing.

“How happy – or unhappy – would you be with large swings in value? If you’re a fairly conservative investor, you shouldn’t allocate more than 5% of your total investable assets to crypto,” Neethling says.

“More aggressive investors could consider allocating up to 25% of their funds, but they should be comfortable with the fact that their returns could drop to zero overnight.”

Neethling notes that there are risk profile questionnaires available online that can help you assess how much investment risk you can comfortably take.

How can I invest?

If you are new to crypto assets, the safest way to invest is to use one of the three big centralised exchanges in South Africa – Revix, VALR or Luno. These platforms allow you to buy cryptos with rands, and they “hold” your currency for you. 

Investment options include up to 60 crypto assets, a “Top 10 Bundle” offered by Revix that allows you to invest in the ten largest cryptocurrencies, and an Inflation Shield Bundle (also offered by Revix), which holds both gold and Bitcoin.

Neethling says the best way to approach crypto assets is to follow a “dollar-cost averaging” strategy, which means continually putting small amounts of money into your investment, such as a fixed rand amount every month.

“This helps to reduce volatility and is safer than investing a lump sum,” he explains.

How can I avoid crypto scams? 

“Currently, there is no legislative oversight of crypto assets, which adds to the risk – but the best weapon you have is education,” Neethling says.

“Stick with one of the top-three centralised exchanges as they’re equipped to safeguard your funds. Also, look out for the word ‘guaranteed’ in promotional material. It’s impossible to guarantee any type of return, or that there will be no negative trading days. Be suspicious of claims that really do sound too good to be true.”

Neethling says a lot of scams use multi-level marketing strategies that reward investors for getting their friends to invest with them. “This means there’s a Ponzi scheme in the making,” he warns.

Scammers tend to target older people who want to stretch their pensions further, building relationships with them for months on platforms such as Facebook, before persuading them to deposit money in an account on a crypto exchange.

Other scams include crypto exchanges offering loans. These aim to obtain your ID number, proof of address and bank details. Debit order scams are also rife, where scammers will use a victim’s details without permission to set up deductions, while claiming to be from a crypto exchange; while third-party deposit scams involve an offer to trade that requires a deposit into an account.

The most common scam sees con artists setting up fake crypto groups that provide “evidence” of people receiving cash. If you’ve joined a crypto group via Facebook, WhatsApp or Telegram but can’t post on the group, it’s fake.

Tips for investors

The FSCA offers the following investment tips:

• If you really want to invest in crypto assets, invest small amounts of money you can afford to lose. Never borrow money to invest.
• Don’t invest on your own. Work with a financial services provider registered with the FSCA (check the website here).
• Read the FSCA’s publications on digital currency, which can be found here.

Tip: Before investing, it’s important to assess your credit health. Register with JustMoney to check your credit score.