Investing safely in Cryptocurrencies

Ben Ritchie

5 March 2021

Over the last six months we’ve seen an increasing popularity in cryptocurrencies such as Bitcoin and Ethereum. This is due to varying factors such as the maturing of regulatory environments, companies moving their treasuries into Bitcoin and investment groups such as BlackRock looking towards the sector for investment. It is also often cited that the rise in popularity of these deflationary digital currencies is at least in part due to the unprecedented amount of quantitative easing occuring around the world. Last year alone 23% of all US dollars were printed, so it’s no surprise companies and individuals are looking to hedge against their currencies.

Due to the rise in the prices of these digital assets over the last year we’ve heard many stories about people losing their beloved digital coins. Before embarking on an investment journey with digital assets, there are several ways to prepare yourself to avoid the pitfalls of the sector:

Research
Prior to investing any amount of money on a cryptocurrency, learn more about cryptocurrencies, and how to invest in them. Don’t always believe what you read online - there are many fraudulent articles and advertisements claiming prominent public figures have invested and received amazing returns and that it’s easy for you to replicate this. Do not be fooled with companies making promised returns. This is not the case with any investment. Take your time, conduct your research, and find the best approach to investing in the sector for you.

Be ready for cryptocurrency’s volatility
Cryptocurrency is volatile and most of the time, very unpredictable. If you are a starter and don't have the advanced knowledge in cryptocurrency investments, you will soon learn that cryptocurrencies are subject to significant hourly and daily price movements. Price movements of these sizes can evoke an emotional response which will be either joy or fear. It’s wise to invest only what you can afford to lose. If you are uncertain about when to make an investment, we recommend dollar cost averaging in over time.

Diversification of Portfolio
Cryptocurrencies are nascent and still in the price discovery phase, despite being in existence for over 11 years and having a total market capitalisation in excess of US$1 trillion. We do not suggest being too clever here, however as with every portfolio, consider diversification. There are a lot of cryptocurrencies available, and you may find that your endeavours to research and understand them all, leave you confused. We do not suggest trying to choose the next Bitcoin - the lower the market capitalisation, the higher the risk that the cryptocurrency will not exist in two years. Don’t over complicate your portfolio.

Be wise on where to store your digital currency
As with any investment, you need a place to store your title to that investment that is safe, secure, and difficult to tamper with. Cryptocurrencies can be stored on a device known as a ‘wallet’. Wallet security plays a crucial role in deciding how and where to purchase your crypto currency. If you choose to venture down the traditional cryptocurrency path and use a device known as a ‘cold wallet’, you must ensure that it is backed up and stored correctly at a separate secure location to your device. This is the leading cause of lost cryptocurrency, and one that is easily avoided if you take the time to correctly educate yourself before commencing.

Alternatively, many investors use trusted counter parties in the sector. It is important to be very careful and vigilant prior to engaging companies that offer crypto currency storage and investment. Find one that’s legitimate and legally compliant.

Australian start-up and Moore Australia (WA) client, Bamboo App, is one such option. Led by Perth based investment firm Digital Capital Management and Brisbane based digital exchange Mine Digital, the micro-investment platform allows anyone to seamlessly purchase digital assets like Bitcoin, Ethereum, Gold and Silver. All you need to do is have a mobile phone and a bank account to start investing. One key feature of the application is that it offers its users the option to create their own customised portfolio to suit them.

In summary, when investing in the cryptocurrencies, take your time, do your research, and ensure that you are investing with trusted counterparties. Be aware of the emotions that investing in volatile markets can produce, and always be vigilant of scams.

More information
For further information on how to invest safely with cryptocurrencies, please contact your local Moore Australia advisor.