Why high risk appetite should not take you to digital currency

With the global economy in turmoil owing to the Covid-19 scourge, individuals losing jobs and the investment scene witnessing fluctuations and slowdowns, individuals are eager to participate in “get rich quick” schemes out of allure or out of desperation.

Naturally, the appeal of such schemes is hard to ignore. Over the years there has been great interest and commotion about cryptocurrency.

Ever since the boom of Bitcoin and the various other counterparts, individuals have been eager to jump onto the bandwagon with the hope that they too will realise such gains.

People are lured by situations where the investment amount doubles in the shortest time possible. While this might be true in some cases, these risky incidences are few and far.

In some cases, individuals have been coerced by fellow crypto-coiners as the notion has been sold under the premise that if you cannot understand it, you are probably not smart enough?

Cryptocurrency is virtual money, which takes the form of token digital coins. Built around the model of blockchain methodology, which involves specific types of decentralised database, these virtual currencies are typically entirely intangible and devolved.

Ease of transfers

A crucial feature of cryptocurrencies is they are not issued by a central authority. The term “crypto” denotes the complex esoteric cryptography feature which is the means by which the generation and processing of these digital currencies takes place, while also referring to their unique mode of transaction across dispersed systems.

Cryptocurrencies are characteristically created as cypher/codes by various assemblies of groups with built in mechanisms for generation and dispensation of the same. They are not tangible financial assets and lack physical element. While proponents celebrate certain tenets of cryptocurrency including ease of transfers, accessibility to credit amongst those in the crypto-ecosystem and confidential transactions, the risks are weighty.

There are many cryptocurrencies (including Bitcoin, Etherium, Litecoin, Dogecoin and dozens others) and global fintech brands dominating the cryptocurrency world.

Here, individuals have been approaching members of the Blockchain Association of Kenya for digital asset brokerage. Alternatively people are accessing online peer-to-peer marketplaces, of which there are many platforms that link purchasers and sellers locally.

Many individuals are pouring in their money into cryptocurrencies and / or “mining” machines with no protection against losses and without a full understanding. This is the same story globally. According to a statement by the Financial Conduct Authority UK, “Cryptoassets are complex, volatile products - consumers investing in them should be prepared to lose all of their money.”

There is a global move towards cryptocurrency but the legality and regulatory structure is continuously under debate. Besides lacking regulatory structures, there are many risks for those investing in this instrument including possibilities of hacking and money-laundering.

Human error

Cryptocurrencies are intangible, illiquid and uninsured, prone to technological or human error and password amnesia as well as susceptible to cyber risks. When bankers start dabbling in cryptocurrencies, it is the equivalent to issuing unsecured loans as there is no physical collateral backing the transaction. Traditional banks would definitely be affected by these currencies.

In a statement in October 2020, the governor of Bank of England, Andrew Bailey stated “it is hard to see that Bitcoin has what we tend to call intrinsic value.” The same applies to other cryptocurrency counterparts. With Kenyan debt progressively increasing, the government is looking at avenues to collect taxes in order to retire the borrowing.

The Finance Act 2020 which took effect in January 2021, has positioned a 1.5 percent tax on the Digital Currency Exchange working in Kenya. It is important to note that the Central Bank of Kenya has issued advisories against use of cryptocurrencies as they are not regulated in Kenya, nor are they backed by the government, thereby rendering them neither lawful nor unlawful, but are clearly not legal tender.

However, as long as existing laws are not broken in Kenya, one may buy and transact cryptocurrencies. It is a very high risk activity and dabbling in cryptocurrencies depends on the risk appetite of the individuals.

The question remains, should one risk all by investing in such ventures, especially during such uncertain times?

Ritesh Barot is a business and financial analyst, humanitarian, conservationist, occasional artist, recipient of OGW honor. [email protected]