If you haven’t heard about cryptocurrency, then you’re either extremely lucky or you’ve been living on a lonely island. This latest trend has all but taken the financial world by storm, promising decentralisation, anonymity, and high returns. While many South Africans are eager to join this digital revolution and reap the promised financial rewards, it is crucial to understand the risks and opportunities that come with investing in cryptocurrencies like Bitcoin, Ethereum, and others.

Take a few minutes to check out this simple overview. You should walk away with a decent understanding of the world of cryptocurrency that will help you as you make your investment plans.

What is Cryptocurrency?

You may have heard of a few of the more popular cryptocurrencies, like Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), and Litecoin (LTC). If you haven’t heard of the others, you will surely have heard of Bitcoin as it is the most well-known and was the first cryptocurrency to launch back in 2009 by an anonymous person or group known as Satoshi Nakamoto.

Essentially, cryptocurrency, or crypto as everyone is fond of saying, is a digital or virtual form of currency that uses cryptography for security. That’s easy enough to grasp. So, instead of using traditional currencies that are issued by governments (think rands, pounds, and dollars), cryptocurrencies operate on decentralised networks based on blockchain technology. For those wondering, blockchain is a distributed ledger that records all transactions across a network of computers. It’s meant to make it so that the system enabling all this virtual cash to exist is almost impossible to alter or hack.

Why Should You Even Consider Cryptocurrency?

There are several reasons why South Africans may consider investing in cryptocurrencies. For starters, crypto offers you a way to diversify your investment portfolios beyond traditional assets, like stocks, bonds, and real estate. This can be rather appealing during times of economic uncertainty. Added to that, while crypto can be volatile, it has shown the potential for significant returns. A notable example is Bitcoin, which has appreciated by over 300% in certain periods.

We would also say that in its favour, crypto can be accessed by anyone with an internet connection, allowing even small-scale investors to take part in the market. What could be the most appealing of all, though, is how crypto can help you hedge against inflation. Given the rand’s fluctuations, crypto is one possibility for those looking to protect themselves against currency devaluation and inflation.

There Are Serious Risks

Clearly the upside is tempting, but this would not be a good overview if we didn’t spend some time unpacking the risks associated with investing in crypto.

Here are a few notable risks to consider:

1. Volatility: Cryptocurrencies are highly volatile, which can lead to serious losses. For instance, BTC’s value ranged from R460,000 to R900,000 within months in 2021.
2. Unregulated: The South African Reserve Bank (SARB) is exploring potential regulations, but with no current regulations, investors aren’t protected against fraud, theft, and other risks.
3. Security Risks: According to the Blockchain Research Institute, over $1.7 billion worth of cryptocurrency was stolen worldwide in 2018, so while blockchain technology is generally secure, the platforms where cryptocurrencies are traded are vulnerable to hacking.
4. Tax Implications: South Africans are required to declare any profits made from cryptocurrency trading to SARS, as these are classified as capital gains.

How To Invest In Cryptocurrencies

Let’s say that you are interested in exploring this world and don’t know where to start. We can give you a simple rundown of the steps you could take to invest and explore, however it’s worth noting that you should always seek advice from the professionals, especially when it comes to the area of finance.

A simple step-by-step guide:

1. Research: Understanding what you’re investing in is crucial to making informed decisions, so study the different types of cryptocurrencies and blockchain technology.
2. Reliable Exchange: You’ll need a trusted cryptocurrency exchange to buy and trade cryptocurrencies, and it’s been noted that Luno and VALR are popular in South Africa.
3. Security Measures: Don’t leave things to chance and use simple online wallets to store your cryptocurrencies. Rather use a secure hardware wallet, like Ledger and Trezor for better protection.
4. Start Small: The reality is that crypto is volatile, so make sure that you start off with a small investment and gradually increase as you become more familiar with the market.

Feeling informed?

Cryptocurrency investment can be rewarding, but it is certainly not a world without its risks. If you are wanting to journey into this financial territory, then make sure that you stay informed about market trends, security measures, and tax obligations.

It’s always better to invest cautiously and only what you are willing to lose as you grow your digital investments – sage advice regardless of what you want to invest in, if you ask us.

And listen, don’t forget that AA Inform is home to a range of useful financial tools and resources, including access our Loan Repayment Calculator, free property valuation reports, multiple car and home insurance quotes through the AA Insurance Supermarket, and much more.