You had me at cryp-to…

Before you invest into cryptocurrency, take a moment to understand the basics and get across the potential risks and rewards.

Cryptocurrency (or crypto) may have started on the fringes, but as it’s moved into the mainstream the “should-I-shouldn’t-I” decision has become one many investors find themselves trying to make. And that’s tough when it’s hard to even understand the opportunity. According to the ASX, the next generation of investors (18–24-year-olds) hold the highest amount of crypto. Their median holding is $2700 and represents 6% of their total portfolio*. If you want to join them, here’s what you need to know:

The bare bones

You will find many (many) complex explanations for crypto, but in basic terms, they are digital currencies you can invest in or use to make limited online payments. They have no legislated value because they’re decentralised, which means no single entity like a government or bank is in charge of setting their value. Instead, they are worth what people are willing to pay, which is part of the appeal. The most well-known cryptocurrency is Bitcoin but you might have also heard of Ethereum or Tether, along with Non-Fungible Tokens (or ‘NFTs’) too.

New kid on the block

Crypto operates online using blockchain technology to create an encrypted network of transactions. Each transaction is added to a ‘block’ in the chain, creating a transparent and secure record. It’s maintained by computers all over the world (sometimes called ‘miners’) that store their own copies of the blockchain, adding and verifying new entries and securing the database against hackers.

Buying power

Crypto isn’t technically money – it’s not an accepted means of payment and hefty transaction fees make it impractical for everyday items anyway. Some people believe it will develop into an improved monetary system similar to the one we currently have, but most people are buying cryptocurrencies as a speculative investment. They’re watching the value and hoping they’ll be able to sell their crypto for more at a later date. 

Risky business

The risks of investing in crypto are many and varied, though perhaps the biggest concern is the volatility of crypto. Its value can vary fast and often, and prices can be dramatically affected by changes to regulations, supply and demand or even media statements.

Crypto scams are also common with people being convinced to invest in fraudulent cryptocurrencies and there’s little to no recourse for getting the money back in this unregulated market. Another issue is that cryptocurrencies are generally held in a broker's crypto wallet or on a crypto exchange. Without the protection of regulation, these brokers and exchanges run a higher risk of insolvency when compared to regulated financial service providers. And because their technology doesn’t need to conform to the same minimum standards, it makes them more vulnerable to hackers, system crashes and other technical problems.

All of this makes cryptocurrency a relatively risky investment. 

*ASX 2023. Australian Investor Study. Retrieved 18/03/2024 from https://www.asx.com.au/investors/investment-tools-and-resources/australian-investor-study