Crypto Assets
Crypto-assets (crypto) include assets described as coins, tokens or sometimes cryptocurrencies. They digitally represent your ownership of a valuable thing or rights to something. They may or may not be backed by physical assets.
Crypto is a high-risk investment. The value of crypto is very volatile, often fluctuating by huge amounts within a short period.
You must be prepared to lose what you invest with crypto-assets and be wary of scammers.
What is crypto?
Cryptocurrencies are a type of asset that exists in digital form and can be managed, stored or transferred typically using a distributed ledger (such as a blockchain). Encryption technology is used to control the amount of currency issued and to record ownership and payments.
Crypto is decentralised by nature, which means there’s no control by a single entity such as a government, bank or financial institution - there are no restrictions on who can issue them.
Many are attracted to crypto investing by the possibility of high returns as they increase in value. Early adopters of cryptocurrencies like Bitcoin have witnessed substantial gains, drawing more investors to explore such digital assets.
But the decentralised and highly volatile nature of crypto means they are high risk, unpredictable and speculative, so it is important to understand what you are investing in and the risks.
Why crypto is so volatile
The price of crypto can fluctuate at extreme levels often based solely on market speculation. Factors that can influence the price of crypto include:
media focus
public announcements
individuals with large amounts of a crypto-asset who promote or influence it through social media
So if you buy crypto-assets, be prepared to lose everything that you put in.
How crypto is used
Crypto assets were first created as a digital alternative to money, but they are not a currency in the normal sense. Some businesses accept crypto as payment for goods and services. Some ‘ATMs’ let you withdraw it as physical money.
Crypto is not legal tender in New Zealand and is not widely accepted as payment. Most people don’t use it for everyday transactions. It is not the sort of investment to use to build your savings.
Once you invest in crypto there may be no regulatory restrictions on how your funds are used and quite often, where they go. In some cases, your funds may be used for other investments, such as loans. This may jeopardise your investment.
Buying and storing crypto
You can buy or sell crypto on a trading platform using money. Or buy or sell it directly.
Crypto is kept in a unique digital or software wallet (hot) or hardware (cold) wallet. Each wallet has private keys (unique codes) that authorise transactions on the blockchain network.
A hardware wallet stores these private keys on a secure device not connected to the internet. This can protect the wallet from hackers.
A software wallet is held by an individual or by a crypto trading platform on your behalf. This can simplify buying, selling and storing crypto.
Types of crypto-assets
Each crypto-asset has different features. Most were not created to be investments.
There are no universally defined categories of crypto-assets. Some common types are listed below, but this does not cover them all. New cryptos are created all the time, but many aren’t well structured and don’t last.
Native tokens
What are they
These are the assets that make the specific blockchain work. They are designed to act as a medium of exchange within the crypto ecosystem, with transfers enabled on blockchains. These can have no intrinsic value and are only worth what people are willing to pay for them, but they derive their value from the demand for the use of the blockchain.
Examples include: BTC, ETH, Litecoin
Stablecoins
What are they
A ‘Stablecoin’ is a marketing term for crypto that aims to maintain a stable value relative to a specified asset, or basket of assets.
Many aim to track the value of a government issued currency (for example, the AUD or USD). Some track other assets such as gold, equities, bonds or other crypto.
Stablecoins try to stabilise their market value by:
being physically backed 1-for-1 by an external asset, such as government-issued currency, gold or securities
being physically backed by a variety of assets where the value of these assets is intended to be greater than the value of the Stablecoin on issue
using algorithms to control the available demand and supply of the asset, such as minting additional assets or adjusting an interest rate for holding the asset
Examples include: Tether, USDC, DAI
Non-Fungible Tokens (NFTs)
What are they
NFTs are tokens which record ownership of an object using blockchains. Each NFT is unique (hence they are not ‘fungible’). However, owning an NFT may not give you exclusive rights to the underlying asset.
Examples include: Board Apes, game tokens
DeFi tokens
What are they
These are tokens created through participating in decentralised finance (DeFi) protocols. Each token will have unique features based on the DeFi protocol that it relates to.
Why investing in Crypto is high-risk
Many overseas crypto exchanges are unregulated and operate exclusively online – there’s no connection to New Zealand. This makes it hard to find out exactly who is offering, exchanging, buying or selling crypto. This can also make it difficult for you to contact the exchange or make a complaint and it is unlikely you will get your money back if things go wrong.
As a starting point, I suggest checking whether the entity is registered on the Financial Service Providers Register (FSPR). Many entities registered on the FSPR are also required to be a member of an independent dispute resolution scheme and may be required to comply with our anti-money laundering and counter terrorism financing law.
If a crypto-asset fails, you will most likely lose all the money you put in. In most countries, crypto is not legal tender. You’re only protected to the extent that crypto fits within existing laws.
The value depends largely on popular opinion
Investing in crypto-assets is highly speculative. The market value can fluctuate a lot over short periods of time. It is affected by things like media hype and investor opinion.
The price of unbacked crypto may depend on:
its popularity at a given time (influenced by factors like the number of people using it)
how easy it is to trade or use
the perceived value of the asset
its underlying blockchain technology
Your money could 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 little chance of it being returned. Crypto marketplaces and trading platforms are also at risk of cyber-attacks.
Do not give other people access to investment information, or access to your digital wallet or encryption keys.
Using a wallet held offline, a ‘hardware wallet’ or ‘cold storage’, may offer more protection.
Crypto scams are widespread
Scammers use crypto because transactions are not easy to recover and have limited oversight. Money can quickly be sent overseas and is very hard to trace.
Scammers rely on many people not understanding how crypto and crypto transactions work and often promote crypto investments as an easy, low risk way to get rich quickly.
Many scams look like “get-rich-quick" schemes and may use attractive ads or fake endorsements from celebrities to encourage people to give or invest their money.
Before you invest in cryptocurrencies, do some research to understand the investment, the risks associated with it, your financial objectives and your risk tolerance. If you don’t understand an investment, walk away.
