Good Morning Cyprian, I have taken interest in your work, I am an upstart analyst, I wish to submit my first article. I also wish to be a regular contributor on your site if this sits well with you. I do hope you enjoy the read. Regards. INVESTING IN CRYPTOCURRENCIES? CRITICAL INFORMATION. 1. Is A Scam!
There is so much negative speculation around Crypto, Bitcoin specifically within our jurisdiction. Media and finance experts create a no - go scenario for would-be investors. The Capital Markets Authority even went ahead to gazette a public notice notifying citizens of the existence of such digital currencies and cautioning us against the trading and transactional use of crypto.
Bitcoin and its peers are all deemed instruments of fraud, but surprisingly, these negative sentiments breed room for curiosity which leads many individuals to try out and end up losing capital fraudulently due to a lack of proper information about what it is they are engaging in.
This year Kenya has been ranked second to Nigeria in the transactional use of Bitcoin in Africa, to the extent that KRA has just introduced a digital ledger transaction tax for companies facilitating crypto transactions.
We need to erode those negative sentiments first and begin with really understanding what is cryptocurrency and the underlying technology. Once you have this information, you will be able to decide for yourself whether or not to invest in crypto.
So basically, no, Bitcoin and Crypto are not scams. But yes, they are extravagantly used for fraudulent activities.
- Underlying Tech.
Crypto-currencies apply a form of tech called Digital Ledger Transaction, whereby peer to peer transfers are distributed and decentralised providing a sense of anonymity. Basically what this means is; I can send you some money, everyone can see that I have sent you money, but no one knows or can know who you or I are. Makes sense?
What they mean when they say blockchain, its basically a series of transactions encrypted in a single server. Multiple servers (blocks) work together to validate transactions.
The industrial applications of DLT are immense, can be applied in insurance, medicine, proptech, security etc. So far I want you to understand this, Cryptocurrency is the application of DLT in finance, Investors are betting on the future dominance of digital currencies as compared to Fiat currencies.
- How are Crypto Currencies made?
Like Bitcoin, some are mined. Literally, anyone can mine Bitcoin. You need some software, a rig (server) and good math you're good to go. To mine these coins, what you will be doing is using your computer as a server to validate peer to peer transactions and encrypting this data by solving complex mathematical problems to determine a hash factor. One Bitcoin right now is worth like Ksh 3.8 million and trust you me, next month it might be worth Ksh 5 million. Bitcoin is actually currently ranked amongst the top five companies in the world by virtue of market capitalisation.
Apart from mining, cryptos are also pegged against a basket of fiat currencies in order to get exposure to price and become instruments of trade.
A third way through which cryptos are made is now through the mad man's syndrome, whereby a rich fellow just wakes up and decides he wants to own a digital coin, so he creates a funny name, prices the coin anyhow, and buys a lot of them. Because he has money he convinces friend and fans to buy the coin and wallah. He now owns a digital currency.
But, In order to acquire actual currency status, there is a transaction/subscription rate that the coin needs to achieve in order to be submitted to BLOCKCHAIN org. for validation in a process similar to the IPO (listing) of companies, in this case, called an INITIAL COIN OFFERING.
- Again what are cryptocurrencies?
Those who are sleeping to wake up because this part is important. As a retail or professional investor, you need to be able to classify investments correctly. Cryptos are NOT SECURITIES as they do not have any underlying value apart from the technology. They are simply digital assets that may or may not appreciate with time. So when going towards this direction please take caution that, when such currency markets collapse, there is no form of compensation to investors available whatsoever because there is no central depository for digital currencies meaning they are NOT regulated.
- Fundamentals Supporting Cryptos.
a) Adaptability
The ability for a currency to be used seamlessly across the world is what sells these cryptos. The more transactions made on a particular coin's network, the more stable the currency becomes over the long run. Endorsement and acceptability by governments and multi-national institutions also aid in supporting.
b) Institutional Use
Generally, buy-side institutions have resorted to buy and hold crypto, for internal operations eg paying salaries, paying suppliers etc. This is in a bid to avoid regulatory oversight.
c) Positive Sentiments from Influential people.
I am telling you the truth, when a celebrity or a respected analyst speaks favourably of a particular coin, all of a sudden it rallies. It has happened severally and will continue to happen due to the emotional nature of retail speculators. That is why most scams will involve hacking into influential people's social media accounts or posting blog links of celebrities "commenting" on certain coins and referring you to a website to buy.
d) Technology
As I mentioned earlier, the more industries the DLT tech impacts, the easier it becomes to sell the currencies.
e) Network Strength
This has to do with the availability of users to solve complex math and actually mine new coins into the ecosystem, (for coins that are mined).
- How you will be scammed.
Two ways: In both scenarios, you will feel stupid but its good you know, because it's like scamming yourself and blaming cryptos.
Before I describe these two means, let me first describe how it is you can actually invest in crypto.
You can either create a wallet with an accredited institution like Paxful, Binance or in Kenya we have Bitlipa. These wallets are well secured with two-factor authentication. Through the wallet, your can buy or sell cryptos through exchanges provided by the platforms. You get to set the percentage margin at which to sell the coins you hold.
You can also create an account with accredited brokerage firms eg Exness, through which you can view technical charts to establish long/short positions in available crypto markets.
Third, you can invest in a structured crypto fund management/hedge fund. This is a vehicle specifically created to pool capital and invest in crypto assets.
In the Crypto wallet exchanges, there is usually an escrow account established to hold the coins while the buyer selects a mode of payment eg Mpesa or Paypal. The coins only leave escrow once you have confirmed receipt of payment. The exchanges also provide relevant profile details and ratings, plus reviews and blocks made on a user account, in order for you to judge user legitimacy/transaction history. Some exchanges have partnered with payment platforms to facilitate full inhouse trading. This is a really safe transactional environment so it's quite hard to get scammed.
But you will be scammed if you are not keen:
- You will send someone money to buy coins but you will not receive any coins and the profile will disappear simply because you did not go through their profile to validate legitimacy. A fraudulent user will lure you with a very low offer, then they eventually retrieve the coins from escrow, claiming the transaction was not completed because you haven't paid and then quickly proceed to offload the coins to another wallet/user and deactivate the previous one.
- You will receive a link on your phone claiming your wallet has been compromised and you urgently need to change your password. Because you love your money, you'll quickly follow the link and begin entering your security details, without checking the URL of the website you are using. This way, you will be giving out all your details to fraudsters without knowing, all they have to do is login and transfer all your coins. These are called phishing sites.
I do not want to teach people how to scam other people so these are the two easiest ways through which you can expect to lose money in the crypto world.
Yes, there is an entire black market eco-system dedicated to criminally utilising these advancements in technology. The drug trade, weapons and all sorts of illegalities are bought using crypto, but even fiat currency is largely still used in such trades but that doesn't stop us from using it.
You see, there is no better way to wrap this up than with logic. If you are sick, you should go to the hospital. Why just why, would you ask your friend to prescribe medicine? Unless your friend is a Doctor, it makes no sense. The same way it makes no sense to ask your friend about crypto unless your friend is a financial analyst.
Let's see if time and chance provides for another dig into the world of crypto.
8th Jan 2021
Mwenesi H. Innovations and Strategy.