Cryptocurrency is now mainstream in Australia, with one in five millennials owning the digital asset and the Commonwealth Bank preparing to offer customers the option of trading crypto on its app.
Some 20 per cent of millennials polled earlier this year in a survey of 1000 investors own cryptocurrency, according to fund manager Vanguard Australia.
But given it’s a high-risk investment and prone to huge swings in value, it’s important to have a solid understanding of how crypto works before taking the leap.
Cryptocurrencies are digital tokens that allow people to make payments to each other through an online system.
They have no legislated or intrinsic value and are worth what people are willing to pay for them.
There are thousands of cryptocurrencies in circulation, with Bitcoin, Ethereum and Binance Coin having the largest market capitalisations.
Bitcoin started 2021 trading just under $US30,000 ($42,000) and reached as high as almost $US68,000 ($95,000) last month.
It plunged 20 per cent last weekend before staging a partial recovery, and was trading at about $US49,600 ($69,000) on December 12.
Invest no more than 5 per cent
Bond University Associate Professor of Quantitative Finance Rand Low said Bitcoin is 15 times more volatile than the S&P500 index, which tracks the largest 500 companies in the United States.
“Cryptocurrency is much more volatile than stocks and is therefore a much more riskier investment than shares,” Dr Low said.
Dr Low said his advice to first-time crypto investors is to stick to high-market capitalisation cryptocurrencies like Bitcoin or Ethereum – and to only invest up to 5 per cent of your entire investment portfolio in cryptocurrency.
“It’s fine to diversify your investment portfolio into cryptocurrency or digital assets, (but) put money in that you are willing to lose,” he said.
Software engineering graduate Michael Senescall, 24, bought his first cryptocurrencies – Bitcoin and Ethereum – earlier this year through Binance, the world’s largest cryptocurrency exchange.
The exchange enables users to have a hot wallet, which is a place connected to the internet to store crypto holdings.
It only took him minutes to set up an account and a few days to have his identity verified.
Mr Senescall devotes about 5 per cent of his entire investment portfolio to cryptocurrencies and doesn’t plan on selling any time soon.
“You definitely can profit with short-term movements. but it’s very difficult and it’s very risky, so my personal decision is to avoid that risk and just go for a more long-term hold where you trust these cryptos will likely be bigger in the … future.”
Beware lucrative promises
Dr Low said investors should beware any cryptocurrencies that offer very high returns over a period of days, weeks or months.
“If it’s too good to be true, it probably is,” he said.
“Any promise to return several hundred per cent of returns or even anything above 20 per cent should be immediately treated as suspicious or extremely high risk.”
Bitcoin transactions are stored on a decentralised database called blockchain, which allows people to trade without the intervention of a third party like a bank.
Blockchain connects groups of transactions together and Bitcoin transactions are publicly available to anyone.
It is secured by cryptography, which is a way of verifying data using complex mathematical codes, which makes the system very difficult to corrupt.