Crypto: The hype, the profits, the fundamental challenge

The need for regulation – and 10 red flags to look out for in the meantime.
The problem with an unregulated industry is that anyone who wants to invest must first do extensive and vigorous research. Image: Chris Ratcliffe, Bloomberg

Recent headlines around cryptocurrency have steered away from its mesmerising mystery and shed light on the inevitable risks surrounding an unregulated financial asset.

Read:
Anonymous data dump ‘spills the beans’ on Mirror Trading International
Karatbars swims in murky waters

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From Ponzi schemes to hacking teams, cryptocurrencies have made the news for all the wrong reasons over the past few months, begging us to ask the question: Where is our beloved bitcoin heading?

Looking at other groundbreaking innovations for reference, there will always be two sides to the coin. An innovation like the internet gave us access to a world of knowledge, but opened up a gateway for the dark web. Similarly, the downfall of artificial intelligence (AI) is that it infringes on our privacy, yet it has the potential to significantly improve our lives.

Regulation

Most technology isn’t inherently good or bad, but both. The important thing is to identify, recognise and address its risks in order to manage its impact on society. In the case of cryptocurrencies, it’s fortunately quite clear that all the major risks associated with it can be addressed through one key point of action: regulation.

Cryptocurrencies and those who provide advice on these digital assets need to be regulated by the Financial Sector Conduct Authority (FSCA) as soon as possible. The issue that we currently have in this unregulated industry is that anyone who wants to invest in cryptocurrencies needs to do extensive and vigorous research before they are able to do so.

In April, the Intergovernmental Fintech Working Group released a position paper on crypto assets to provide specific recommendations for the development of a regulatory framework for crypto assets in South Africa. One of the objectives outlined in this paper was that a regulatory framework for cryptocurrencies should also ensure consumer and investor protection, which includes financial consumer education.

Unfortunately, anything that links cryptocurrencies to something sinister decreases the momentum on the mass adoption of the technology.

We want to ideally move into a space where cryptocurrencies are regulated, so that people are able to embrace the technology for investment or practical use without being afraid of fraudsters.

Once cryptocurrencies and virtual asset service providers (Vasps) are regulated, the regulations will require businesses that operate in the industry to be audited. This will add to the credibility of the industry and build the required trust.

From an investment perspective, trust is everything.

Clients trust their asset managers to know the difference between a good investment and a scam. The first and lowest hurdle to clear when considering an investment opportunity is whether that investment is regulated. 

The requirements of most businesses and individuals operating in this industry that I have spoken to rest on two specific goals:

  • Regulation of the environment, and
  • Education of the general public.

While experts work on drawing up a regulatory framework for crypto assets, education on good practices by Vasps is vital.

Cryptocurrency, like any technological advancement, comes with both highs and lows. Its potential is endless, but its current pitfalls are unavoidable.

Red flags

If you are new to cryptocurrencies, here are 10 red flags to look out for:

  1. White papers or investment methodologies that are extremely difficult to understand and follow.
  2. Complex and vague explanations of the investment opportunities.
  3. Promises of guaranteed returns that seem unrealistic.
  4. A countdown clock with a deadline not to miss a once-in-a-lifetime opportunity.
  5. Phrases that link wealth generation to short timelines, such as ‘Your money should work for you’.
  6. Attractive pictures of luxury cars, beaches and so on.
  7. Poorly-built presentations asking you not to contact the company involved, but rather the person you received the presentation from.
  8. Bogus testimonials on websites that create the illusion of credibility.
  9. Fictitious teams or employees who cannot be found on LinkedIn.
  10. Income that is not predominantly generated by the growth of your investment, but from a referral fee.

Five tips when investing

If you are familiar with cryptocurrencies or are planning to invest through a Vasp, here are five tips to take note of:

  1. Never give out your password.
  2. Beware of phishing emails that require you to update information or log into bogus sites that look like your Vasp’s site.
  3. Do your homework and look for a reputable service provider with a proven track record that can be trusted, such as Luno or Revix.
  4. Do a Google search – as easy as that!
  5. If you manage your own public and private key, follow best practice in ensuring that your private key is stored safely.

Read: SA crypto pioneer Luno finds a US buyer

Security is everything, whether you safeguard your own crypto or make use of a Vasp.

Wiehann Olivier CA (SA) is a partner at Mazars South Africa.

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Calling Cryptocurrencies a financial asset is a bit rich.

Maybe you should explain to Wiehann what an asset is!

LOL–It is beyond stupid !!

haha ..wait!!!

There’s people in this thread still negative about cryptocurrency??

You guys surely cant be so naïve?

Consensys (Ethereum) have a board seat in JP Morgan. Yes the same company led by Jamie Dimon who called crpyto a scam are the biggest investors & owners of crypto ..you do the math;)

>50% of fortune 500 companies are currently, actively building on ethereum. The list is simply too long to put here.

China has already soft-launched DCEP (central bank backed digital currency)

*This Week* the chairman of the CFTC (google it) described Ethereum, and I quote:

“Let me say how impressed I am with Ethereum …The whole idea of DeFi really is, number one, it’s obviously revolutionary, and I think at the end of the day could lead to a massive disintermediation of the financial system and the traditional players,”

“And ultimately, [it] could potentially even reduce systemic risk in some ways because we don’t have the finance system concentrated in these large globally, systemically important institutions

I could go on but it seems we are among dinosaurs here who prefer listing to mainstream media.

So investing in shares on the stock exchange should also not be considered financial assets?

There is very little difference between owning a number of crypto coins, which appreciates in value due to demand and decreases in value due to lack of demand. Exactly as your shares on the JSE.

It has survived non regulation for more than a decade and is still in its childhood. Very few bad things happened in the mean time with crypto, even without regulation and mainly due to the inherent security that the blockchain offers. There would therefore be no reason why it needs regulation at all.

The JSE in comparison is heavily regulated and people still find ways to cook their books in order for the share price to become inflated, with nothing really backing it.

Don’t regulate the crypto industry please? Allow supply and demand, with the inherent security it provides, to dictate price.

Once “regulated” we will things like capital gains taxes and vat creep in.

Keep the socialists away please.

Its been months now that the “regulator” FSCA has been investigating Mirror Trading International.

How does it take months to establish if it is a legitimate business and does actual trades. Its going stronger than ever.

These “regulators” in SA is just a load of hogwash.

Maybe Mirror trading international should take the “regulator” to task and make them pay for badmouthing their business without any proof.

Who pays these “Regulators”?????

There is Bitcoin and then there are copycat scams

No amount of Government(s) regulation will ever control Bitcoin. Its practically becoming the new Gold standard, when people cannot aquire gold

Good luck SARS

The market gives to everyone what he wants. Consumers incentivise entrepreneurs to fulfil their needs. Why did cryptocurrencies develop? What need is supposed to be satisfied by these tokens?

Initially it was the anonymity and ease of cross border movement and payment that motivated individuals to buy bitcoin. Regulating authorities across the globe are moving fast to plug this hole. Some have already regulated crypto as a commodity, while other are in the process of regulating it as a financial product. FICA, Know-Your-Client and anti-money laundering rules are removing anonymity. Soon, the product will also be taxed if it incurs a capital gain.

Reserve Banks across the globe have a monopoly on the issuance of currency, and they will enforce this monopoly with their monopoly on violence and force. They will protect their banking systems and like all international money transfers, crypto transfers will have to go through the Authorised Dealers.

Any legitimate cryptocurrency will have to tick all these boxes, otherwise it is illegal from the word go. No anonymity, no tax avoidance, no escaping money-laundering or money-transfer laws and without any protection against devaluation, what is the need for a crypto token?

When we chisel away everything that crypto is not, then it emerges that crypto can be a transferrable token that represents a financial asset. This is exactly what a share certificate is. Kongo Gumi, established in 578 AD, is the oldest continually operating company in the world. The Japanese have been trading, what we today call crypto, for the last 2000 years.

>> Reserve Banks across the globe have a monopoly on the issuance of currency, and they will enforce this monopoly with their monopoly on violence and force.

this may be a little too honest for most people’s comprehension

I actually meant to say that governments have a monopoly on force and violence and they execute this right through the military and the police force. Since there is this “independent” cooperation between most governments and their Reserve Banks, the government will enforce the monopoly on the issuance of currency. Therefore, crypto has no future as a currency. It may have a future as something else though.

Hi Sensei
I too doubt the future of private cryptos, the banks are moving as fast as they can to create a digital currency of their own. The EU, China and Brazil are leading the way, some with experimental regions in progress. Many countries are desperate to circumvent the swift system while there are other advantages too. EU banks are in trouble. Digital currency can stop bank runs, click of the mouse, what bank run? The socialists have run out of money and as Maggie predicted, its all great until they run out of other people’s money. Digital currency leaves no place to hide from taxes, which is sold as stopping money laundering by criminals. The CV-19 scam is being used for many agendas, sold as The Big Reset, for our benefit of course. Included is the “need” to reset the world’s monetary system via the IMF and World Bank. Once the world starts running a digital currency private crypto will be made illegal. Since the agenda is made to appear “social and beneficial” IMO it’s true course is autocratic dominance and control. Who is driving The Big Reset?. Socialists/ marxists, academics and oligarchs.
So, I assume you see gold as the much preferred safe haven investment – not crypto?
Would you also see gold as the counterweight to an equity portfolio? In what ratio?
Greetings and best wishes.

Hi Foshan

You made some interesting and valid points. If crypto is nothing less than a token that represents a specific amount of gold, or an Exchange Traded Fund even, then it will serve some purpose and represent something of value.

Gold is an alternative form of cash and not an investment per se. I park in gold if I do not find better listed opportunities elsewhere. To compare opportunities I price them in terms of ounces of gold, rather than in terms of fiat currencies. At the moment the relative strength of the Nasdaq Index is on par with gold. It is the only index that is not crashing in terms of gold. Therefore, I carry some Nasdaq shares and gold and an outperforming gold mine. That’s it. Too much diversification can take you straight to the poorhouse.

“this is exactly what a share certificate is”

*cringe*

Sensei I agree that regulation will come but crypto is far more than a share certificate, its trust without 3rd parties. that sounds trivial until you see how inefficient all financial services are. clunky blockchains today are more efficient (cost & speed) than cross-border payments through private banking channels.

Now remove trusted 3rd parties (read: inefficient) from other sectors, basic legal disputes, file storage, api indexing, government admin processes, gaming platforms (the profit centre of tencent & the SA economy), cloud servers (AWS Amzons profit centre), you start to see what it really is ..simply the next version of the internet. nothing more nothing less.

You (or regulators) can stop it, just turn off the internet. (even then it won’t be dead, just dormant).

All the best for your share certificates p.s. they’re already tokenised on several blockchains if you look.

Trying to regulate the most free market in the world is laughable.
The economists told us what sound money is and the cypher punks listened, the verdict is out on wether it succeeds, the biggest deal here is that entrepreneurs figured out how to create wealth and scarcity in the digital realm.

Cryptocurrency is a farce.

Those who trade it are typically techies who get excited by the word “crypto” and the technology behind it, or those who like to pick up on buzzwords and hype and enjoy the mysticism of this unknown inventor who has a pseudonym and keeps everyone guessing while the baseless currency magically appreciates and depreciates.

As with a casino, you only hear from the winning stories. The losers quietly scurry away and remain very quiet.

I wont touch cryptocurrency.

It is pure hype, the brain dead suckers are reeled in endlessly.
For every one who makes it big, there are a hundred who lose out.
If you don’t understand something completely, stay away.

You are speaking from a very uninformed position, unfortunately. If you invested R100 or any other amount of your choice in BTC over the period 15 July 2018 to 15 June 2020, each time with the chosen amount on the 15th of every month thereafter, your growth in the first year was in the order of 65%. The year after that turned out around 38% growth.

No other asset class achieved that kind of growth in that period. Not even the New York stock exchange. I don’t even want to mention the JSE over that period.

Do you understand the difference between an investment case and historical returns ?

Bernie Madoff investors had great returns , but turns out there were no fundamentals.

Ah, I can remember the Bitcoin frenzy of November/December 2017. Luckily I only bought R500 for sh!ts and giggles. The price hasn’t come close since.

Next time you will be too red faced to utter a giggle. What you say is, you are not up to date with the crypto world. Remember my friend, Capetown prepared for day zero, now the dams are full. Things change, hope you get serious about crypto. You will own it again, maybe you will sit tight until it get to 50K

1) dont read hundreds of white papers,read the bitcoin paper 2) history of the greenback is recent , think roughly 120 years ( read “history of american currency” by american Numismatic Society. Things change, exponentially. Current financial system is fragile, btc is an asymmetric bet on future disruptions. 3)Mafia-State , violence and fiat spilled blood through centuries.Read “war making and state making as organized crime” by Charles Tilly as weel as anything by Fredric C Lane( eg economic consequences of organized violence and economic meaning of war and protection) 4) the crypto horse has bolted, in fact there is a gate but no fences.Suggest follow some thinkers in the crypto space esp Nick Szabo and a number of others. Just 1 example: most of bitcoins in circulation will never go through an exchange again( will never be converted to fiat again). Will be mixed and mingled and be send through the ether between secure wallets as a means of xchange or stored as an asset. Obviously banks-mafia-state entity is concerned and will throw everything at it. If btc does not “work ” eventually, the subsequent version will.

An article written by an auditor, about to be disrupted by the very thing he is writing about. And missed the point almost entirely.

It is amazing how bi-polar this crypto issue has become. Protagonists totally enamoured or diametrically opposed at every turn.

Central banking got a foothold in Europe through the Rothschild cabals in the 19th century who financed both sides of every conflict in the major wars on Mainland Europe in the spread of the Hapsburg Empire and Napoleonic clawback periods.

Their spread, like a virus, to the USA, faced stiff opposition from people like Abe Lincoln who favoured silver-backed currency. Finally, in 1908 through interest group sponsorships of Presidential candidate Woodrow Wilson, they secured control of the USA too. And they have held it ever since.

This process went hand-in-hand with their development of Central oil and the internal combustion engine technology. The ultimate pyramid scheme actually- the all-seeing eye that “regulates” the World.

Central Banks now have total control of the fiat currency arenas. At the drop of a hat, they can print more money. The balance of interest rates, a traditional tool of the taxman, has itself been petered down to zero/ negligible effect in recent times. The central banks have even more power now than ever before- unchecked and unharnessed while the World masks up for a pandemonium!.

In essence, this power is the power that is entrenched in the system from top to bottom is the power to hack into household savings.

Each devaluation of fiat currency reduces the value of household savings and investments immediately. A tool that enables these faceless and private controllers of the exchequer to put their hands in everybody’s pockets and take whatever they want, whenever they want- without physically doing so, they are stealing value from everybody at will!

This is at the core of the delinquent behaviour that benchmarks modern democratic governance. There are multiple conflicts of interest masked by this anonymous array of central bankers and their invisible shareholders.

Interestingly, alongside Abe Lincoln, the Tsar of Russia was also heavily opposed to the Rothschild money lending rackets. He and Abe Lincoln maintained independence from the Wiley banker cabal and their “soft” loans by adherence to the silver and gold currency standards.

This is the real reason why the entire Russian Royal lineage was brutally murdered when the “Whites” and “Reds” had their showdown in 1918. The hit was a small-print pre-condition of both sides’ financial “arrangements”!

Crypto assets are the first alternative means of exchange technology to counter this pestilence of double standards and daylight robbery. The very notion that they can be controlled outside of the immutable blockchain technology and the market norms of viability, value and acceptance show zero understanding of the underlying core processes and technology.

Sure there are going to be duds and scams but also no-brainers and value-breakouts as the value-chain waters are tested on more and more levels.

Ultimately the biggest crypto of them all has not yet been born. As illustrated- and as part of a diversified investment strategy, surely there are educated risks well worth taking?

Virtual and real currencies exist for two reasons: as an exchange for goods and services which is a function of both real and cryptocurrencies; as an investment instrument in physical assets as a hedge against loss for which actual currencies are used in the purchase of company stock, bonds, land, fine art etc.

Both fluctuate in comparative value but cryptos far more than real currencies as they are not backed by physical assets, like a Picasso painting or a plot of land in Clifton: using cryptos as an instrument of investment purchase doubles the risk potential.
So the argument for cryptos as an investment has no logic.

And as an instrument of trade, I can use a Visa card which does the same thing far more efficiently and globally. And allows me a 30 day settlement period.

As settlement and exchange of credit and debt become more virtual, the temptation to slice and dice is just too much for opportunists like the CC dealers and also gave rise to the same practice in derivatives in the stock exchanges.

You, are fast asleep my friend. When you wake up, you will be too ashamed to say sorry. Such a pity you do not go and see how crypto evolved and which major cards are linked to bitcoin.

I don’t need any other credit cards or ways of paying for my groceries thanks. It costs me the price of a few coffees.

Yeah … I’ve been “woke” for a long time.

I finally got Luno to stop sending me emails to join their so-called new financial system.

So, Beachcomber is unaware that if you have a card linked to your crypto that it is not a credit card. By the time he will buy bitcoin the price may be around $150,000 for one bitcoin. All because of what he believe now.

So, you critics are so in love with the FIAT currency, nothing wrong with printing money. Enjoy your road to nowhere and kick yourself when one bitcoin go stronger than 100,000 USD Lekker slaap swaer.

So many ignorant naysayers here while Wall Street, as of today, owns over $7bn in Bitcoin!

Ask yourself what they know that you don’t.

End of comments.

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