**Today’s sponsored guest post comes from the Canadian Securities Administrators (CSA). This has been reviewed and approved by Moneywehave.com
Cryptocurrencies are a hot topic of conversation these days and have been since the beginnings of bitcoin in 2009. While they may seem like an exciting prospect, there are a few things you should consider before buying crypto-assets to ensure you’re always making informed decisions and protecting yourself from unnecessary risk.
1. Cryptocurrencies are not actual currency
Although they may be used as a payment method, cryptocurrencies are not issued or currently backed by central banks, nor are they legal tender.
Deposits of Canadian money into an eligible account at banks are generally insured by the Canada Deposit Insurance Corporation (CDIC) up to a certain amount. This insurance protects you in the case of a bank failure. There is no such insurance for cryptocurrencies.
Storing your cryptocurrencies is more complicated and riskier than keeping money in a bank account. Many people have lost assets when digital wallet services and cryptocurrency trading platforms were hacked, without any payback from the operator.
2. They can be volatile
Because of their lack of regulation and very few constraints to prevent currency manipulation, cryptocurrencies are prone to large swings in market value – gaining or losing 10 to 30%, and sometimes more, over the course of a day. This makes holding cryptocurrencies very risky. Any cryptocurrencies you own could stand to lose some or all of their market value at any time.
3. Cryptocurrency markets operate largely outside of regulation
In the world of finance, regulations are intended to protect consumers and investors and provide remedies in the case of loss or damage. If there is no central regulating authority, you aren’t likely to find help in a dispute and your investment’s value is vulnerable to being manipulated.
4. They can be expensive to buy and trade
Beyond the lack of constraints on the price of cryptocurrencies, the fees required to trade on crypto-asset platforms are generally unregulated and can differ greatly between platforms. These fees have the potential to erode profits, so it’s important you understand the full cost. You also need to factor in cryptocurrency taxes which can require quite a bit of paperwork.
5. Traditional exchanges and cryptocurrency trading platforms are not the same
Cryptocurrencies often are purchased through online cryptocurrency trading platforms, often called “exchanges”, which allow you to buy, sell or exchange cryptocurrencies for other cryptocurrencies or conventional money (like dollars) – typically for a fee.
Although they may call themselves exchanges, these trading platforms are not authorized or licensed by any Canadian securities regulatory authorities. Unlike traditional exchanges, they may have no minimum requirements that issuers of cryptocurrencies must meet before their cryptocurrency can trade on the platform, and trading isn’t typically monitored for potentially manipulative or disorderly trading activity.
Cryptocurrency trading platforms operate around the world. These platforms may be vulnerable to fraud and market manipulation. In addition, the same cryptocurrency may trade for significantly different prices on different platforms.
6. You may not be able to get your money from a cryptocurrency trading platform right away
There is no guarantee that the trading platform will have enough cash on hand at any given time when you want to convert your cryptocurrencies to cash. Furthermore, crypto-asset platforms may impose limits on how much cash you can withdraw at a time.
7. You could be susceptible to cybersecurity threats and hacking
Cryptocurrency trading platforms and online wallet providers are a target of cyberattacks because they hold the private keys for your crypto-assets. Hackers target these platforms to steal the private keys and, ultimately, users’ cryptocurrency. You may not be able to recover your assets if the trading platform you are using is hacked or if someone finds your private key. Cyberattacks may also be intended to disrupt trading on these platforms, causing technical difficulties.
Cryptocurrencies are part of a developing and evolving set of novel financial products and services with currently immature adoption by consumers. Before deciding to buy, be sure to consider the above and ask yourself if you know:
- Your long-term investment goals;
- Your individual risk tolerance;
- What you’re purchasing, from all angles; and
- Where to go for help.
As with any purchase, it’s best not to jump aboard until you fully understand the product. Your power as an investor starts with information, and with so many new risks facing capital markets, it’s important to exercise that power – now more than ever.
If you are interested in learning more about another aspect of cryptocurrencies – Initial Coin Offerings (ICOs) – please watch the video the CSA put together on the topic.