Open your eyes to the many potential risks of digital currency
To some people, cryptocurrency is the newest and most exciting application to the electronic payment market, with many jumping at opportunities to trade these currencies for profit.
Cryptocurrency is a digital currency that can be used to buy goods and services. It can be used for investments and even to raise capital
for companies who want to avoid traditional funding routes. Crypto assets, as they are called, are traded, transferred and stored electronically.
You may have heard of Bitcoin or Ethereum, but did you know that there could be as many as 10 000 different types of cryptocurrencies traded globally?
The topic of cryptocurrency was one of many topics unpacked during Money Smart Week South Africa (MSWSA), earlier this year, with its importance being brought into the spotlight again ahead of National Savings Month in July.
The Financial Sector Conduct Authority (FSCA) offers consumers some important warnings when it comes cryptocurrency.
Why is cryptocurrency popular?
Cryptocurrencies are making inroads into the area of fintech, specifically because of its Blockchain
Technology, a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system.
“Fintech products and services are increasingly starting to attract new customers and this stems from the fact that fintech products generally offer lower costs and tend to be easy and fast to use. They also tend to have features that are not typically seen within the realm of traditional products and use data that personalize features which become specific to consumers. This results in many consumers becoming attracted to this
type of financial transaction, leading these products to grow in prominence,” explains Kagiso Mothobi Department Head for the FinTech Unit at the FSCA.
Cryptocurrency itself has become popular because of the low fees associated with it, the ease of trading, the fact that they are not related to any government or country, and the perception that using cryptocurrency to pay for things may be a lot safer than traditional payment options.
Why can cryptocurrency be risky?
Cryptocurrency exchanges have been prone to hacks and other criminal activity. For this reason, crypto is considered to be a risk, as these security breaches have led to sizable losses for investors who have had their digital currencies stolen, never to be seen again. Frauds and scams are also rampant in
the crypto industry.
The FSCA issued a warning earlier this year, stating that it had ‘noted with concern’ the increasing volume of crypto asset-related losses suffered by financial consumers earlier this year.
These risks are further compounded by unregulated firms targeting consumers with marketing material that highlights the rewards, but not the potential downside and possible risks when it comes to investing in cryptocurrency.
Cryptocurrency is also considered an extremely risky investment as there is a higher chance that you may lose more than you gain. Often, newcomers to this type of trading can suffer major losses with their first investments, until more experience and knowledge is acquired. It is important to do your research, and to only invest money that you can afford to lose. Start investing with a realistic expectation. It may also be helpful to set investing limits for yourself.
Because crypto-related investments are not regulated by the FSCA or any other body in South Africa, if something goes wrong, you are not likely to get your money back and will have no recourse against anyone.
How to protect yourself:
- Don’t trade without a plan
Having a strong and well-thought-out trading plan is essential. Most people who fail in the crypto market begin trading without a plan. Having a well thought out strategy gives you direction because you will be able to decide what to trade, as well as when and how much to invest.
- Don’t select cryptocurrencies without research
If you decide to start cryptocurrency trading, it can be easy to follow the trend and not think things through. You need to know exactly what you are getting into, which means researching before selecting the crypto in which to trade.
- Don’t be greedy
The biggest enemy of every crypto trader is greed. You should follow the limits you have set for yourself, whether it is related to profits or to losses. If you don’t take profits or follow what is called a stop-loss, you could end up worsening your own financial situation. A stop-loss is an advance order put in place to sell an asset when it reaches a particular price point.
- Don’t let your emotions take control
One of the biggest mistakes that every crypto trader needs to avoid when trading is to let their emotions get in the way. Due to the volatility of the crypto market, the fluctuations in price can be sudden and drastic, which makes it easy for anyone to panic. However, this is where you need to control your emotions and stay calm. Rather than making decisions in a panic, you should think carefully, assess the situation, and then decide what to do.
It is for all of these reasons and risks that the FSCA is working at finding measures to regulate certain aspects and players in the crypto asset space, with South Africa to soon officially implement cryptocurrency trade and investment laws.
Money Smart Week (MSWSA) is a financial education drive aimed at motivating and empowering South Africans to become more educated about their finances, with education about protecting your hard-earned money and better managing your finances being at the centre of this campaign.
Go to www.mswsa.co.za for information about this and other important financial topics to help you better manage your money, as well as advice about how to save and invest safely.