What You Need to Know About Crypto Assets and Investing

Investing in crypto assets can be a thrilling experience, but it's essential to understand the basics before diving in.

Crypto assets are decentralized digital currencies that use cryptography for security, and they're not issued by any government or financial institution.

The first cryptocurrency, Bitcoin, was created in 2009 by an individual or group using the pseudonym Satoshi Nakamoto.

Investing in crypto assets can be a high-risk, high-reward endeavor, with prices fluctuating rapidly due to market volatility.

To mitigate risks, it's crucial to set a budget and stick to it, just like you would with any other investment.

Crypto assets are often traded on online exchanges, where buyers and sellers interact directly with each other.

A crypto asset is a digital representation of value or rights that's secured by encryption and typically uses distributed ledger technology, also known as a blockchain.

This technology allows data to be recorded and stored across a network of participants, keeping the data secure and eliminating the need for a central authority to grant permission to access and participate in the network.

Crypto assets are created and managed without the need for a central authority, making them theoretically immune to government interference or manipulation.

They exist on decentralized networks, which means there's no single central data storage point or one central authority that grants participants permission to access and participate in the network.

This decentralized nature of crypto assets has led to a surge in speculative trading, where people trade just because they've heard it may rise in value, rather than seeing evidence to support a potential rise.

Crypto assets come in many forms, and understanding the types can help you decide whether an investment is worth considering. Knowing whether a coin has a purpose can make it less risky than one without a use.

Most cryptocurrencies have a specific function, such as facilitating transactions or serving as a payment method. For example, Bitcoin is the most well-known transactional token, designed to be used as a payment method. Utility tokens like XRP and ETH serve specific functions on their respective blockchains, making them less risky investments.

Here are the main types of crypto assets:

Digital Types are a crucial aspect of understanding the crypto world. Many cryptocurrencies are designed to serve a specific purpose, such as facilitating transactions or providing a staking mechanism.

Utility tokens, like XRP and ETH, are designed to serve specific functions on their respective blockchains. They're like the Swiss Army knives of the crypto world, but instead of knives, they have a specific purpose.

Transactional tokens, on the other hand, are designed to be used as a payment method. Bitcoin is the most well-known example of this type of token. You can use it to buy a coffee or a house, just like you would with traditional currency.

Governance tokens represent voting or other rights on a blockchain. Uniswap is an example of a governance token, where holders can vote on proposals for the platform.

Here are some common types of digital assets:

Crypto assets can also be categorized as investments, payments, or creating a coin to fund a project. It's essential to understand the purpose of a cryptocurrency before investing in it, as it can help you decide whether it's worth investing in.

Stablecoins are a type of cryptocurrency designed for price stability, with prices linked to fiat currencies, commodities, or other crypto assets.

They have the potential to bring efficiencies to payments and promote financial inclusion, but also pose financial stability risks due to their potential reach and adoption across multiple jurisdictions.

Stablecoins are created and distributed through trading platforms in exchange for fiat currency, and their issuers can use the proceeds to invest in reserves or other assets.

A widely adopted stablecoin could become systemically important, challenging the comprehensiveness and effectiveness of existing regulatory and supervisory oversight.

The FSB has agreed on 10 high-level recommendations to promote consistent and effective regulation, supervision, and oversight of stablecoins with the potential to become globally systemically important.

Here are the three characteristics that distinguish a global stablecoin (GSC) from other crypto-assets and stablecoins:

These characteristics make GSCs unique and pose unique risks, including the potential for systemically important status.

Buying cryptocurrency requires a visit to a cryptocurrency exchange, where you can buy or sell coins at the current market price, similar to a stock. These exchanges are businesses that facilitate transactions between users.

To store your coins, you'll need to transfer them to a digital wallet or use a third-party service like Coinbase. Some brokerage platforms, such as Robinhood, also allow you to invest in cryptocurrencies, although you can't withdraw them for purchases.

Using crypto as a means of payment is currently limited, with only certain companies accepting it, like IT and travel companies. However, some investors see potential benefits in using stable, fiat-currency-linked cryptoassets for faster, cheaper, and more efficient payments.

Using crypto as a payment method is still quite limited, but it's not unheard of. Certain IT and travel companies accept crypto, but it's unlikely you'll be using it for everyday transactions like grocery shopping or paying your football league fees.

Cryptoassets tend to be volatile, making them unreliable as a payment method. This is because their value can fluctuate greatly from one day to the next.

However, there are some potential benefits to using certain types of cryptoassets, specifically those linked to fiat currency, which are less volatile and more stable. These could provide faster, cheaper, and more efficient payments, especially for cross-border or micro transactions.

Some investors believe that cryptos could one day be widely accepted in everyday transactions, but for now, it's essential to be aware of the risks involved.

To buy cryptocurrency, you'll need to visit a cryptocurrency exchange, a business that allows you to buy or sell cryptocurrencies from other users at the current market price.

You can transfer the coins to a digital wallet or use a third-party service like Coinbase to store your coins.

If you only want to buy cryptocurrency as an investment, you can try using your brokerage, such as Robinhood, which allows users to invest in bitcoin and other cryptocurrencies.

However, keep in mind that you cannot withdraw these cryptocurrencies from the platform for purchases.

Investors may also choose to hold Bitcoin futures ETF shares, which provide exposure to the crypto asset class without requiring the investors to maintain their own wallets.

Investing in crypto assets requires a solid understanding of what you're buying. The FSB's report warns that crypto-asset markets are fast evolving and could reach a point where they represent a threat to global financial stability.

It's essential to do your own research, as the crypto community emphasizes. This means understanding the potential risks and rewards, as well as the underlying technology and market dynamics.

The G20 has charged the FSB with coordinating the delivery of an effective and comprehensive regulatory framework for crypto-assets. This framework is still evolving, but it's crucial to stay informed about the latest developments.

Crypto-assets can be used for various purposes, including investments, payments, and creating a coin to fund a project. However, it's essential to be aware of the potential risks and consequences of investing in crypto-assets.

Here are some key factors to consider when investing in crypto-assets:

These factors can have a significant impact on the financial system, making it essential to approach investing in crypto-assets with caution and a clear understanding of the risks involved.

Crypto-assets are vulnerable to financial stability risks, similar to those in traditional finance, due to leverage, liquidity/maturity mismatch, operational/technological fragilities, and interconnectedness.

The Financial Stability Board (FSB) has warned that crypto-asset markets could pose a threat to global financial stability due to their scale, structural vulnerabilities, and increasing interconnectedness with the traditional financial system.

In 2023, the FSB finalized its recommendations for the regulation, supervision, and oversight of crypto-assets and markets, targeting global stablecoin arrangements that may pose more acute threats to financial stability.

The FSB has also delivered a joint paper with the IMF to ensure effective and coordinated implementation of the comprehensive policy framework for crypto-assets.

The regulatory status of cryptocurrencies varies by jurisdiction, with some countries considering them as legal property, while others have banned them.

In the US, cryptocurrencies are considered a form of money but are treated as financial assets or property for tax purposes, with the government taxing capital gains or ordinary income depending on how long the taxpayer held the cryptocurrency.

Here are some key regulatory environments for crypto-assets:

The U.S. has a complex relationship with cryptocurrencies. The Financial Action Task Force (FATF) recommended in June 2019 that wire transfers of cryptocurrencies should be subject to AML compliance.

Cryptocurrencies are considered a form of money, but the IRS treats them as financial assets or property for tax purposes. The government wants a piece of the profits if you reap capital gains from selling or trading cryptocurrencies.

In July 2023, courts ruled that cryptocurrencies are considered securities when purchased by institutional buyers but not by retail investors purchased on exchanges. This was seen as a victory for crypto.

Crypto exchanges are regulated by the SEC, as are coin offerings or sales to institutional investors. So, crypto is legal in the U.S., but regulatory agencies are slowly gaining ground in the industry.

As of June 2024, El Salvador is the only country to accept Bitcoin as legal tender for monetary transactions.

CBDCs are a type of digital asset that represents a nation's fiat currency and is backed by its central bank. Not all nations issue CBDCs.

Central banks are exploring the use of CBDCs for making payments, and they can also facilitate cross-border payments and transfers. This can make international transactions faster and more efficient.

CBDCs are not the same as cryptocurrencies, which are decentralized and not backed by any government or institution.

DeFi is revolutionizing the way we think about finance. It's an umbrella term for a variety of financial applications provided through digital assets.

Decentralized finance, or DeFi, is built on the blockchain, which allows for the automation of complex transactions and financial activity. This is made possible by smart contracts, which enable us to access and manipulate digital assets via code.

Digital assets can be used as a medium of exchange, and DeFi takes it a step further by providing financial opportunities. These opportunities can be built into the options on purchase of a digital asset, such as getting a loan or insurance.

Some examples of DeFi financial instruments include tokenized versions of stocks and bonds, as well as tokenized versions of real world assets like real estate. This enables new possibilities for investing and financial activity.

Here are some examples of DeFi financial instruments:

DeFi is changing the game by providing a new way to access and manipulate digital assets. It's an exciting development in the world of crypto assets.

Global stablecoins are a type of cryptocurrency designed for price stability, with prices linked to fiat currencies, commodities, or other crypto assets.

The FSB has identified three characteristics that distinguish a global stablecoin (GSC) from other crypto-assets and other stablecoins: the existence of a stabilisation mechanism, usability as a means of payment and/or store of value, and potential reach and adoption across multiple jurisdictions.

These characteristics pose unique risks, particularly if a widely adopted stablecoin becomes systemically important in and across one or many jurisdictions. The FSB has agreed on 10 high-level recommendations to promote consistent and effective regulation, supervision, and oversight of GSCs and stablecoins with the potential to become GSCs across jurisdictions.

The emergence of GSCs may challenge the comprehensiveness and effectiveness of existing regulatory and supervisory oversight, making it essential to address the financial stability risks they pose. The FSB's roadmap aims to enhance cross-border payments and ensure effective, flexible, and coordinated implementation of the comprehensive policy framework for crypto-assets.

A global stablecoin can bring efficiencies to payments and promote financial inclusion, but it also requires robust regulation and oversight to mitigate potential risks. The FSB's recommendations support responsible innovation and provide sufficient flexibility for jurisdictions to implement domestic approaches.

Here are the 10 high-level recommendations agreed upon by the FSB to regulate and oversee GSCs:

Japan's Payment Services Act defines Bitcoin as legal property, giving it the same rights and protections as traditional currencies.

In Japan, cryptocurrency exchanges are required to collect information about customers and details relating to wire transfers.

China has banned cryptocurrency exchanges, transactions, and mining, but it's exploring a Central Bank Digital Currency.

India is still formulating a framework for cryptocurrencies, and until it's enacted, crypto is not yet illegal in the country.

Scammers have been increasingly active in targeting potential investors in the crypto market.

People's interest in crypto has surged over the last few years, making it a prime target for scammers.

If something sounds too good to be true, it probably is - a warning to be cautious of investment scams.

You can find more information on how to protect yourself and others from investment scams on the ScamSmart site.