Cryptocurrencies are digital tokens you can buy through an online exchange or through Initial Coin Offers (ICOs).
Many online exchanges are unregulated, so it’s important to understand the risks before you invest.
3 things you need to know about cryptocurrencies like Bitcoin
They’re high risk and highly volatile – the price can go up and down very quickly
They’re not regulated in New Zealand
Cryptocurrencies, crypto-exchanges and the people that use them are often the targets of hacking, online fraud and scams
What are cryptocurrencies?
Cryptocurrencies use encryption technology to control the amount of currency issued and to record ownership and payments. They are not legal tender (money that must be accepted as payment) and do not exist physically as notes and coins. There are over 1,300 different cryptocurrencies available on the internet including bitcoin, ethereum, ripple and litecoin.
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 exchanges 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.
Some cryptocurrencies are offered through ICOs. These are high-risk investments offered by a business or individual raising money for an online venture, like the development of a digital platform. Funds are raised by issuing tokens.
People buy or use cryptocurrencies to:
make a profit if the cryptocurrency increases in value
make payments directly without going through the banking system
benefit from lower (usually zero) transaction fees compared with traditional banks and other online payment processes when purchasing goods and services
invest in a business or individual raising money through an ICO.
Understanding the risks
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.
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 are lots of 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 (CFDs) where you make (or lose) money by predicting how the price of cryptocurrencies might change. These products are typically offered with leverage so you may only pay a portion of the value of your trade upfront but if you lose, you will need 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 market places and exchanges 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 exchange you use:
is registered on the Financial Service Providers Register (FSPR)