Three things investors should understand about cryptocurrencies

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The Bitcoin craze has awakened the public to the burgeoning cryptocurrency space, which now has almost 1400 types of ‘coin’ listed by Coinmarketcap.com.

Many cryptocurrencies have experienced significant growth in recent times, but high fees, long transaction waiting periods, links to the criminal underworld and complexity around how values work are some of the negative points to emerge.

An average Australian thinking of investing in the space needs the right preparation, according to Josh Callaghan, general manager, wealth at financial comparison company Canstar.

“Cryptocurrencies exist to remove the middle man- banks primarily- from global financial transactions enabling large scale person to person exchanges of value without using a third party,” Mr Callaghan said. “It’s a revolutionary idea but for the everyday Aussie it can be risky. If anything happens such as losing your account number, private key, having your details hacked or funds not turning up in your account, there’s no-one to call for help. In most cases, your money is simply lost forever.”

Before investing, Mr Callaghan said three key aspects needed to be understood: the coin’s value, the cost of the investment and security.

He said values were hard to determine, but could be linked to the aim of the coin, which is to either solve a problem for a group of users or deliver a new service that will improve users’ lives.

Bitcoin prices have gone through the roof, so what else is out there?
Bitcoin prices have gone through the roof, so what else is out there?Source:Supplied

“Make a judgment on the usability of the coin and how much demand there might be for that improvement,” he said.

Assessing cost was a matter of the price of the investment, plus the additional costs involved.

“A number of exchanges operate to exchange Australian Dollars into cryptocurrencies and enable users to buy and sell other cryptocurrencies using Bitcoin or Ethereum,” he said. “These exchanges typically make their money from the difference between the market price of a coin and the price they sell it to you for ... there can be hundreds of dollars difference and they often put a small fee on top of that for processing the transaction.”

Once purchased, you need to make your coins secure.

“A good security step is to enable two-factor authentication on your account and store your coins in a secure wallet,” Mr Callaghan said. “The onus of storing and protecting your account information and passwords is entirely on you.”

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Damien Hatfield of Triple A Partners recently formed EKT Active Fund, an actively traded cryptocurrency and ICO fund.

“Cryptocurrencies is just another asset class,” Mr Hatfield said. “But I think the technology base is here to stay. It’s new, it’s now established and it is going to grow and grow.”