Cryptocurrencies are high risk, speculative products that operate differently to traditional investments. Only invest what you can afford to lose and use New Zealand-based platforms to give yourself some level of protection.
5 things you need to know about cryptocurrencies like Bitcoin
Cryptocurrencies are a type of cryptoasset. They use encryption technology to control the amount of currency issued and to record ownership and payments. Cryptocurrencies are not legal tender (money that must be accepted as payment) in most countries and do not exist physically as notes and coins. They are also not viewed as financial products so are not regulated in New Zealand. There are over 4 000 different cryptocurrencies available on the internet including Bitcoin, Ethereum and Litecoin to name a few.
When you buy cryptocurrency, it is held in a ‘digital wallet’. It can be used to buy goods or services from anyone willing to accept it. Cryptocurrency trading platforms enable you to buy and sell cryptocurrency and some allow you to convert it back into money (like New Zealand dollars) at any time, if someone is willing to buy it.
People buy or use cryptocurrencies to:
Many overseas cryptocurrency exchanges are unregulated and operate exclusively online – with no connection to New Zealand. This makes it hard to find out who is offering, exchanging, buying or selling it. It also makes it unlikely you’ll recover your money if things do go wrong.
Using cryptocurrencies may make you a target for scammers or businesses selling high-risk investments.
What you acquire with your cryptocurrencies may pose additional risks as well. An emerging use of cryptocurrencies is to buy NFTs. An NFT is a digital certificate of ownership of a unique digital asset stored online (for e.g., the digital representation of a piece of artwork or sporting memorabilia). This record of who owns what is stored on a shared ledger known as the blockchain, the technology that underlies cryptocurrencies.
However, be aware that they may not be a financial product and not regulated as such. Like any speculative product do your due diligence and be aware of the lack of protections, should something go wrong.
Cryptocurrency value can change quickly
There are lots of cryptocurrencies available. If one becomes popular its value may increase quickly, but its value can also suddenly drop, sometimes permanently.
The risk increases if you invest in the futures market through contracts for differences (CFDs) where you make (or lose) money by predicting how the price of cryptocurrencies might change. These products are typically offered with leverage so you may only pay a portion of the value of your trade upfront but if you lose, you will need to repay the full amount borrowed, plus any amount you’ve lost. Even small movements in currency values can have a big impact on any gains or losses you make.
Your ‘coins’ may be stolen
All online transactions are at risk of cyber-crime. The cryptocurrency in your digital wallet can be stolen just like the money in your real wallet – with very little chance of it being returned. Cryptocurrency marketplaces and trading platforms can also be at risk of cyber-attack.
CERT NZ has some great information on ways you can keep your digital wallet more secure.
Cryptocurrencies aren’t widely accepted
Cryptocurrencies have less practical value than money which can be used to buy all goods and services.
Make sure any New Zealand platform you use:
Know what you’re getting into, including how the currency is stored and transferred, and how to get your money back.
Store your login details securely. If you forget them or enter your details incorrectly, you may not be able to access your money permanently.
Understand how to access a payment record. You may need to prove you’ve made a payment – to get a refund for example.
Find out more
For information about the dangers of using cryptocurrencies in the futures markets, see these warnings from other overseas regulators: