With a track record spanning a decade back, cryptocurrencies are clearly more than just a fashion phenomenon, but they remain largely misunderstood by many people, with persistent doubts about their true value, practical application and long-term use.
There is also great concern about their volatile nature and potential for exploitation. According to data from Scamwatch, Australians lost $ 158 million on investment fraud between January and May this year, the majority of which involved “investments” in cryptocurrency.
In the truest sense, cryptocurrencies are a digital exchange medium that uses cryptography as a form of security. But in recent times, the term “cryptocurrency” has evolved into a replacement description for, more broadly, a decentralized financial system (DeFi), a highly volatile asset class that can dive or float on the back of a tweet, a space for malicious actors to steal the identities and money of vulnerable investors and a form of digital payment.
Traditional investors, as well as Australian financial institutions, are also more than fleetingly interested in cryptocurrencies.
The Commonwealth Bank is testing crypto trading through its banking app, ANZ recently minted $ 30 million Australian stack coins called A $ DC, and the National Australia Bank (NAB) is also poised to release its own stack coin (linked to the currency). fiat, the Australian dollar) before the end of 2022. However, concerns about the security of cryptocurrencies as an investment class remain a major concern for financial regulators around the world.
The simple answer is that they are not outside the bounds of blockchain technology, which we will get into later.
More fundamentally, the current legal status of cryptocurrencies varies greatly from country to country. While the use of cryptocurrencies is unhindered in the EU, some countries, such as Turkey, have banned payments made in cryptocurrencies.
In Australia, cryptocurrency is legal but largely unregulated. Many cryptocurrencies and other digital assets are generally not considered financial products, so the platforms where you buy and sell cryptocurrencies may not be regulated by the Australian Securities and Investment Commission (ASIC).
The Australian Prudential Regulation Authority (APRA), which regulates the financial services industry, provides a policy roadmap for financial entities dealing with crypto business. A draft standard is expected by the end of 2022. However, APRA has been keen to stress that it will not stifle innovation, and President Wayne Byres said in a speech reported by The Australian Financial Review: “Like our approach to climate risk, the underlying message is above all to” innovate with by all means, but proceed with caution and in full awareness of the risks “.
The Australian Tax Council is also developing a policy framework for the taxation of transactions and assets involving cryptocurrency.
The consumer group CHOICE, meanwhile, continues to push for better consumer protection, some of which have lost huge sums on crypto fraud or market volatility.
“As it stands, enforceable protections in the unregulated cryptocurrency market fall somewhere between insignificant and non-existent,” says CHOICE.
“In a statement to the federal government, CHOICE calls for a regulatory regime to help harm the end consumer.”
Most cryptocurrencies operate without the backing of an authority, such as a central bank or government. This fundamentally distinguishes them from traditional currencies, such as the US or Australian dollar.
Instead of government guarantees, the operation of cryptocurrencies is based on what is called blockchain technology (see below).
Instead of existing as a physical stack of banknotes or coins, cryptocurrencies are limited to the Internet. Think of them as virtual tokens whose value is determined by market forces generated by people who want to buy or sell them.
Today, about five thousand cryptocurrencies exist. Bitcoin is by far the largest, followed by Ethereum and Tether. The market value of a cryptocurrency is equal to the unit price of a currency multiplied by the number of existing units. Even after the cryptocurrency collapse in May 2022, the market was still valued at around $ 910 billion.
Cryptocurrencies can be purchased with traditional cash such as Australian dollars and can then be used on its own to purchase a growing range of everyday goods and services. Cryptocurrencies have the same value in all countries, facilitating person-to-person transfers around the world, while eliminating the issue of exchange rates.
In fact, only a limited number of Bitcoins exist – cryptocurrencies are compared to a digital form of an asset such as gold, where a perceived stockpile is then subject to the laws of supply and demand.
Currently, this is the biggest appeal of cryptocurrencies: that they can be traded on exchanges similar to how stock market investors buy and sell stocks and other commodities.
What is blockchain technology?
Basically, a blockchain is a type of database. Blockchain first became prominent as the technology that supported Bitcoin when cryptocurrency was first discussed in an article on peer-to-peer electronic payment systems in 2008.
The article was attributed to Satoshi Nakamoto, who was allegedly the pseudonym of a person or group of people. Part of the design of the cryptocurrency meant that only 21 million Bitcoins would ever be created.
Blockchain is essentially a public record of every bitcoin transaction that takes place. A recording is distributed on many computers and cannot be changed or modified retroactively. According to cryptocurrency advocates, blockchain transactions are more secure than traditional payment mechanisms.
New monetary units such as Bitcoin are produced on the blockchain through “mining”, which requires huge amounts of computing power and therefore uses significant amounts of energy. Environmentalists have warned that the proliferation of cryptocurrencies could have a significant impact on global efforts to reduce energy consumption.
The most common places to buy Bitcoin and other cryptocurrencies are specialized exchanges. This includes a number of trading platforms and apps that allow investors to buy cryptocurrencies using traditional currencies and / or other cryptocurrencies.
To open an account, potential resellers are usually asked to provide their passport information, a phone number and an email address. Trading costs can vary from stock exchange to stock exchange. Some providers charge a fixed fee per. transaction, while others charge a percentage of the total transaction amount.
The performance of cryptocurrencies can be notoriously unstable with roller coaster peaks and troughs. In 2013, an individual bitcoin was only worth a few dollars. At the time of writing (July 2022), the price was just above the $ 20,000 mark – a huge increase from nine years ago, but far from the highest level of almost $ 68,000 that it reached at the end of 2021.
What is Cryptocurrency Mining?
Cryptocurrency mining refers to the process of generating crypto and verifying new coins. It is an extremely complex enterprise involving lots of decentralized and global computer networks, and as many environmentalists point out, it is carbon intensive.
In the United States alone, Bitcoin mining is estimated to generate around £ 40 billion in carbon emissions.
Australian appetite for cryptocurrencies
Despite risks and a lack of regulation, Australian investors have embraced cryptocurrency in recent years. A report from the US cryptocurrency exchange Gemini showed that almost every fifth Australian (18%) bought digital currencies in 2021.
According to Gemini State of the World Cryptography report, 43% of Australians invested in crypto for the first time in 2021, with many citing inflation as the primary cause. In addition, around 54% of Australians saw cryptocurrency as a good way to diversify their assets, with 81% choosing to keep their crypto investments for the long term.
Data from the trading platform eToro reveals that more than a quarter of Australian investors aged 18-34 have at least 10% of their portfolios invested in cryptocurrency, making the asset class particularly popular among Generation Y.
What happens next?
Even before the pandemic upheavals of 2020 and the cryptocurrency crash that began in November 2021, many experts questioned their security, practical use, and long-term viability. Hence the stern and repeated warnings from financial regulators and consumer groups that people should approach investing in this area with extreme caution.
If more traditional investment firms dip their toes in the cryptocurrency water, we can see the value of digital assets increase, with their use normalized and more widespread. It also remains to be seen how the sector will respond to the financial regulation being discussed in Australia.
In the uncertain times we live in, it is also possible that the whole concept of cryptography may prove to be vulnerable or unsustainable in the face of as yet unforeseen challenges.
To paraphrase regulators: “buyer beware”.
This article is not an endorsement of any particular cryptocurrency, broker or stock exchange, nor does it constitute a recommendation of cryptocurrency as an investment class.