Crypto investing is both simple and mind-blowingly complex. Photo / 123RF
Crypto investing is both simple and mind-blowingly complex. Photo / 123RF
Opinion by Diana Clement
Diana Clement is a freelance journalist who has written a column for the Herald since 2004. Before that, she was personal finance editor for the Sunday Business (now The Business) newspaper in London.
Don't try to get rich quick with cryptocurrency. Yes, there are ways to make money. You can also lose.
Yes, some New Zealanders have quite literally made millions of dollars off the back of their crypto investments. But before you jump on the bandwagon, for goodness sake educate yourself. Noinvestment is foolproof.
When you hear of people investing in cryptocurrencies, they're almost always trading it in similar ways to people who buy and sell other currencies.
Crypto investing is both simple and mind-blowingly complex. The starting point, says Stace Hammond lawyer and crypto investor James Cochrane, is that cryptocurrencies, of which there are more than 6500, are money. You can buy stuff and sell stuff with them.
Most currencies start with an initial coin offering (ICO), where the company behind the currency looks to raise money. Some, says Cochrane, were probably little more than scams. Then, once on the open market, the currencies' values are set by what people are willing to pay.
People who do particularly well in any investment cycle that takes off are often the ones that get in early, and get out when the asset is high, which isn't easy to time.
It's important to remember that you're not buying an asset such as a property, share, or term deposit that produces an income. You make money when the currency rises in value.
Bitcoin, the first cryptocurrency, was created on January 3, 2009. On November 20, 2015, one Bitcoin was worth $497.99. Its most recent high was $90,018 on April 13 this year.
Other digital currencies such as Ethereum launched later and again some of the early traders did best. The earliest price I can find for Ether was $16.85 on October 14, 2016; it was at $5384.51 on May 7.
Like any currency, you can earn interest on deposits. The term deposit equivalent for cryptocurrency is Cefi and Defi, says Cochrane. You deposit your cryptocurrency with a third party, who lends it out to someone who needs to borrow money.
You can also use your cryptocurrencies to buy investments. Cochrane points to New Zealand company Ruby Play Network. Investors were offered both shares and Ruby token rights when Ruby raised money through the Snowball Effect marketplace.
One thing I do know from many years' experience in personal finance, is the investment du jour is the topic of numerous BBQ conversations and endless news articles, and someone is going to lose their shirt.
Bitcoin, the first cryptocurrency, was created on January 3, 2009. Photo / 123RF
The other thing, as Cochrane points out, is that cryptocurrencies are under constant attack by hackers, looking to steal money from people's wallets. Bitcoin, he says, has never been cracked. Other currencies have.
Cochrane himself has a diversified portfolio of KiwiSaver, a Sharesies share portfolio, exchange traded funds and then crypto last.
When he first started in crypto, he allocated $100, opened several wallets, in case one was hacked, and bought some currencies to see how it worked. Then he did what all crypto investors should do. He read everything he could get his hands on and watched endless YouTube videos on the subject.
He uses bog-standard personal finance strategies for his crypto investments, such as good solid research, buy and hold, he doesn't put all his eggs in one basket, and uses dollar-cost averaging. The latter ensures that he buys a little and regularly to ride the volatility.
And boy are there some ups and downs with crypto investing. Just Google "Bitcoin winter". In 2017/8 Bitcoin had a nearly 80 per cent correction (fall), says Cochrane.
A very important point that Cochrane makes is no one keeps records of your investment. If you lose your electronic wallet or die and no one has a record of your holdings, that's it.
Crypto assets may not yet be regulated here. Nonetheless they're taxable by the Inland Revenue Department (IRD).
Finally, if you want to learn and have some fun, then allocate a small sum of money and start buying some crypto assets. The worst that can happen is you lose some or all your money. At best you make a nice tidy sum.
