If you hate reading, investing in crypto might not be for you

Crypto-related investments are not regulated in South Africa and most people know too little about how crypto works to ensure they are not throwing their money into a deep hole of scams, never to be seen again.

“People who want to invest in crypto must know the market, but most people treat it like gambling. My advice would be if you have no financial knowledge, stay away from investing in crypto. If you cannot read and understand the crypto white paper, you do not have the required financial knowledge,” says Chris Cammack, head of content at tradeforexsa.co.za, a website that reviews regulated brokers in South Africa.

Crypto currencies are digital representations of value that are not issued by a central bank and are traded, transferred and stored electronically. They are used for payments, investments and raising capital.

A crypto project releases a white paper that offers investors technical information about the concept, as well as a roadmap for how it plans to grow and succeed. Cammack says it is important to see what to expect and who you are buying from.

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The dark side of crypto

Developed nations have started to look at crypto investing to see if it could be linked to money laundering and are regulating crypto exchanges, but Cammack says the infrastructure to regulate crypto properly is huge and countries need the political will to do it.

However, it is a good question to ask where does the money go. Does it go to funding terrorism? Crypto can be immoral if it is really difficult to regulate fairly and if there is ideology behind it, although regulation can alienate the industry.

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Social media

He also points out that scammers use social media such as Telegram, Facebook, WhatsApp and Instagram to lure their victims. They especially like Telegram because it is anonymous. About 50% of the scams in South Africa start on social media.

Cammack says social media companies should do something about this but they do not want to be the bad guys, so government should put pressure on them to act.

People must beware of just giving their money to someone to invest in crypto. They use all kinds of complicated jargon to catch their victims, while it is simply a Ponzi scheme where the first people to “invest” are paid their returns from the “investments” of people who join later.

Scammers usually do not know anything about crypto currencies and how to invest in them, Cammack says. As crypto is anonymous, it is impossible to reclaim any funds.

The problem is that you will not know if the company encouraging you to invest in crypto is legitimate, because it is not regulated by the Financial Sector Conduct Authority (FSCA), which is also bad for South Africa’s reputation, such as the Mirror Trading International (MTI) scheme, which was called the biggest scheme ever in the world.

Why do people choose to invest in crypto instead of other regular investments? According to Cammack, people believe that crypto will offer them freedom from government. Unfortunately, they then also give up their right to be protected by government.

People who invested in MTI are cross because government is not moving fast enough to get their money back, but they invested in an alleged illegitimate scheme.

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Remember when you consider crypto investments

The FSCA already warned people in February that crypto currencies are not covered at all in South Africa and that you will not get your money back if something goes wrong.

The FSCA receives a large number of complaints from local investors who have lost their savings through investing in a crypto-related investment that they did not understand or a scam packaged as a crypto investment promising unrealistically high returns.

The FSCA says people who want to invest in crypto currency should keep in mind that:

• Crypto investment firms may overstate potential pay-outs or understate the risks
• Investing in crypto assets generally involves taking very high risks with investors’ money, which could mean you should be prepared to lose all your money
• There is no guarantee that crypto assets can be converted back into cash which leaves you at the mercy of supply and demand in the market
• The price of crypto assets is dictated by the underlying mood or sentiment of the general public with no underlying basis for value determination, while the prices are driven by the worldwide sentiment which is in turn driven by people who have an interest in the value of the crypto asset being driven up
• Many concepts used by multi-level marketers and Ponzi scheme operators are applied to make potential investors scared of being left out, thereby continuing the cycle of new investors to drive up the price
• There is no guarantee that when you wish to sell, the sentiment will still exist and that buyers will even exist or be available to buy the crypto asset from you
• There is often high price volatility, which increases the financial risk.

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How to protect yourself from crypto scams

People can take these precautions if they have money to invest in crypto, Cammack says:

• Educate yourself first by reading about it on a website such as Investopedia
• Google is your friend – google the company’s name and see if there are any complaints about it
• Stay away from companies that offer guaranteed returns as it is only done to make the company look more legitimate
• Another alarm bell is the request to deposit bitcoin or other crypto via Luno, a legitimate crypto exchange that allows users to send crypto to anyone else with a Luno account.

The FSCA warns people that:

• Regardless of the level of risk you are prepared to accept, ensure that crypto assets only make up a small proportion of your investment portfolio
• Get proper advice regarding the overall suitability of such a high-risk product in your investment portfolio and the impact should it fail
• Invest with open eyes regarding the high risks involved
• Understanding that these type of investments are not appropriate for the vast majority of the South African population and that more appropriate and balanced investment products are available
• Do not be pressured to go with the flow and do not be afraid of being left out of the “next big thing”.

What the FSCA is doing about crypto investments

The FSCA is considering declaring crypto assets as a financial product, which would give the FSCA jurisdiction over these transactions and enable the authority to protect consumers.

If you really want to invest in crypto, rather do it yourself on platforms such as Luno. And remember: “if an investment looks too good to be true, it usually is”.