Investing in cryptocurrency is all the rage, with literally thousands of crypto products popping up on social media. People are often tempted to invest as crypto influencers promise instant wealth.

In South Africa, the Financial Sector Conduct Authority (FSCA) has issued a crypto health warning – crypto-related investments are not regulated by the FSCA or any other body in South Africa, and investors could easily lose all their money and have no chance of recovering it.

We investigate the crypto investment landscape, whether it’s possible to invest safely in cryptocurrencies, and which red flags one should watch out for.

What are crypto assets?

Crypto assets take the form of digital money, the value of which isn’t backed by any central bank or government. This means that their value largely depends on market sentiment – how buyers and sellers feel about it at any given time.

“Bitcoin – the crypto asset most of us know – is very volatile,” says Gustav Neethling, the director of WealthPro. “Bitcoin investors doubled their money in November last year, but over the past year, its price in rands has been down almost 2%. You can see massive price movements in a single day – up to 30%, for example – and this has led to people speculating on the currency.”

This doesn’t mean that cryptocurrencies don’t have potential for investors, however. “Cryptocurrencies are in their infancy, but I believe they’ll be deemed a fifth asset class in which to invest, alongside equities (shares in a company), property, government bonds and cash,” Neethling predicts. “They may even be regulated later this year, which will make them a safer choice for investors.”

Should I invest?

Neethling says that, because crypto assets are extremely volatile, it’s important to understand your risk profile before investing. “How happy – or unhappy – would you be with large swings in value? If you’re a fairly conservative investor, you shouldn’t allocate more than 5% of your total investable assets to crypto. More aggressive investors could consider allocating up to 25% of their funds to cryptos – but they should be comfortable with the fact that their returns could go down to zero overnight.”

There are online risk profile questionnaires that can help you to find out how much investment risk you’re happy to take on, says Neethling.

How can I invest?

If you are new to crypto assets, the safest way to invest it to use one of the three big centralised exchanges in South Africa – Revix, VALR or Luno. These platforms allow you to buy cryptos with rands, and they ‘hold’ your currency for you.

Investment options include up to 60 crypto assets, a “Top 10 Bundle” offered by Revix that allows you to invest in the ten largest cryptocurrencies, and an Inflation Shield Bundle (also offered by Revix), which holds both gold and Bitcoin.

Neethling says the best way of approaching crypto assets is to follow a ‘dollar-cost averaging’ strategy, which means continually putting small amounts of money into your investment, like a fixed rand amount every month. “This helps to reduce volatility and is safer than investing a lump sum in crypto assets,” he explains.

How can I avoid crypto scams? 

“Currently, there is no legislative oversight of crypto assets, which adds to the risk – but the best weapon you have is education,” Neethling says. “Stick with one of the top three centralised exchanges as they’re equipped to safeguard your funds. Also, look out for the word “guaranteed” in promotional material. It’s impossible to guarantee any type of return, and it’s also impossible to guarantee that there will be no negative trading days. Be suspicious of claims that really do sound too good to be true.”

Neethling says a lot of scams use multi-level marketing strategies that reward investors for getting their friends to invest with them. “This means there’s a Ponzi scheme in the making,” he warns.

Farzam Ehsani, CEO of VALR, warns that scammers are targeting older people on platforms like Facebook as they build trust easily, and seniors want to stretch their pensions further. “If an older relative starts talking about crypto, ask them to show you what they’re doing,” Ehsani says. “Scammers will often build relationships with potential victims for months before persuading them to deposit money in an account on a crypto exchange.”

Other scams include crypto exchanges offering loans to obtain your ID number, proof of address and bank details; debit order scams, where scammers will use a victim’s details without permission to set up a debit order claiming to be from a crypto exchange; and third-party deposits where people offer to trade for you but require a deposit into their account.

“The most common scam sees con artists setting up fake crypto groups that provide ‘evidence’ of people receiving cash withdrawals. If you’ve joined a crypto group via Facebook, WhatsApp or Telegram but can’t post on the group, it’s fake, so don’t DM the owner of the group to ask how to invest,” warns Ehsani.

Tips for investors

The FSCA offers the following investment tips:

• If you really want to invest in crypto assets, invest small amounts of money you can afford to lose. Never borrow money to invest.
• Don’t invest on your own – work with a financial services provider registered with the FSCA (check the website here).
• Read the FSCA’s publications on digital currency, which can be found here.

Published by Fiona Zerbst for JustMoney