A GUIDE TO CRYPTO ASSETS
The world of crypto can be complexed and confusing, so we created a simple guide to help you understand the basics!
2021 marked a significant year for Crypto-assets, starting with Tesla buying Bitcoins and Elon Musk’s continuous Tweets aboutcrypto-assets Dogecoin and Shiba. The country of El Salvador then set a new standard by adopting Bitcoin as legal tender. To helpnavigate the complexities, we created a simple guide for you!
The important terms
A crypto-asset is a digitally traded representation of value that can be electronically transferred for the purpose of payment or investment.
Cryptocurrency or fungible tokens are virtual currency based on blockchain technology. There are thousands of cryptocurrencies in circulation with the most popular being Bitcoin and Ethereum.
Decentralised networks use several machines to distribute transaction workloads and enables direct, peer to peer, transactions to take place by removing the middleman (usually banks) to exchange funds. Sophisticated algorithms are used to balance the incoming and outgoing requests to ensure the best response time.
Non-Fungible Tokens (NFTs) are digital assets that represent real-world objects like art, videos, game items and even music. They have unique identification codes and are often encoded with metadata. They are usually traded online using cryptocurrencies.
How is it used?
Bitcoin, the decentralized digital currency that first appeared 12 years ago, was our first introduction to the blockchain technology which underpins most of the innovation in the crypto space. The industry, and investor interest, have grown at an exponential rate, as the security and innovation has developed. The growth includes the development of decentralized finance (DeFi), a public decentralized blockchain network for financial products that cut out the middleman (defined as banks and brokers), Smart Contracts, and other blockchain based technology that enable payments to be made and received digitally without the involvement of traditional banking systems.
Where is the risk?
Although crypto is innovative and exciting, there are risks that need to be considered. First and foremost, the lack of regulation. There have been several Ponzi schemes and scams that have taken advantage of the lack of regulations and complex nature of crypto-assets to steal investors’ money. It is imperative to note that crypto-assets, including cryptocurrencies, are not deemed to be legal tender in South Africa. Currently, the only legal tenders are the coins and notes printed by the South African Reserve Bank (SARB). This doesn’t mean that goods and service providers don’t accept crypto-assets as means of payment, they can do so, if they choose to. It means that there is little to no recourse around the unethical use of crypto-assets as it doesn’t fall under any regulatory body – an important risk that anyone involved in the crypto market needs to be aware of.
Secondly, crypto-assets are difficult to value (or price). There is no intrinsic value to a crypto-asset, as there is no physical asset backing it, or defined measure of worth. Crypto-assets pricing is driven by market sentiment, basically how much one person is willing to pay for it and how much another person is willing to sell it for. This means that the price can be drastically impacted by something as simple as an influential person’s Twitter post, such as Elon Musk’s posts about Bitcoin, making the asset incredibly risky.
Should I immediately invest in Crypto?
We encourage you to speak to your NMG financial consultant if you are interested in gaining exposure to crypto-assets. When doing so it is of the highest importance to understand not only the benefits, but also the risks that are associated with it, and to consider how they play into the dynamics of personal portfolios and investment goals.
Regulation 28 limits which govern retirement products, are in place to protect investors. Currently this regulation doesn’t allow for investment into crypto assets as the current level of risk perceived by regulators is too high for retirement savings products, however, this doesn’t mean that investors can’t gain exposure through other products in South Africa.
The information in this communication is for information purposes and is not intended to be detailed advice described in the Financial Advisory and Intermediary Services Act. The fund, administrator and trustees cannot be held liable for damage or loss suffered as a result of any action that you take based on the contents of this communication.