3 things you need to know about cryptocurrencies like Bitcoin
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.
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.
1. Cryptocurrency value can change quickly
There are lots of cryptocurrencies. 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.
2. 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.
3. 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 exchange you use:
This may give you some chance of recovering money lost.
Know what you’re getting into, including how the currency is stored and transferred, and how to get your money back
Understand how to access a payment record. You may need to prove you’ve made a payment – to get a refund for example.
For more information about the risks of investing in cryptocurrencies have a look at:
For information about the dangers of using cryptocurrencies in the futures markets, see these warnings from other overseas regulators: