3 things you need to look for about cryptocurrencies 

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.

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.

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.

Understand the risks

Many cryptocurrency exchanges are unregulated and operate exclusively online. 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

1. 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.

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.

Know what you’re getting into, including how the currency is stored and transferred, and how to get your money back

Store your login details securely. If you forget them or enter your details incorrectly, you may not be able to access your money permanently.

Understand how to access a payment record. You may need to prove you’ve made a payment – to get a refund for example.

Understand the common warning signs of a scam and the steps you can take to protect yourself.

The Financial Regulator of New Zealand, FMA, notes that if to use any New Zealand exchange make sure that:

• is registered on the Financial Service Providers Register (FSPR)
• is a member of a dispute resolution scheme
• holds your New Zealand dollars in a trust account.

Source: FMA

Read also: 1 in 2 Initial Coin Offerings (ICOs) failed in the second quarter — and those that succeeded suffered huge losses

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