Investing in crypto

Learn more about the features, risks and benefits of investing in crypto-assets.

Introduction to crypto assets

Crypto-assets (crypto), refers to digital assets such as cryptocurrencies, coins, or tokens and their related entitlements. Crypto-assets do not exist physically as traditional bank coins and notes, but usually as digital tokens, which rely on cryptography and technology such as blockchain for functionality, security and other features. [1]

Since the first crypto-asset launch in 2009, there has been a significant increase in the number of crypto-assets available around the world. These crypto-assets have many use cases such as for payment systems, to execute automated contracts, and run programs. Anyone can create a crypto-asset, so at any given time there can be thousands in circulation.[2]

Crypto-assets are a high-risk and volatile investment. The value of a crypto-asset can fluctuate by significant amounts within a short period of time. Unlike national currencies, which derive part of their value from being legislated as legal tender, or shares in companies which entitle shareholders to equity and a portion of the profits in a company, some crypto-assets may have no legislated or intrinsic value, and may simply be worth what people are willing to pay for them in the market.

As with many investments, you must be prepared to lose what you put in when seeking exposure to crypto-assets.

Types of cryptocurrencies

Investors in companies whose shares are listed on a regulated exchanges (such as the ASX, NASDAQ, or New York Stock Exchange) may be familiar with the different industries and sectors companies are grouped into using methodologies such as the Global Industry Classification System[3] (e.g., industrials, energy, healthcare, and information technology).

Each crypto-asset has the potential for different capabilities or use-cases and, while there is no widely adopted “industry” classification system, organisations have begun to use similar concepts to help investors group the growing number of digital assets. The CoinDesk Indicies Digital Asset Classification Standard (DACS) [4] classifies digital assets into 7 broad sectors as follows:

DACS Sector	Description	Example crypto asset
Computing	The Computing sector consists of projects that aim to decentralise the sharing, storing, and transmission of data by removing intermediaries and ensuring privacy for all users.	Chainlink (LINK) Filecoin (FIL)
Currency	The Currency sector refers to any non-pegged digital asset acting exclusively as a medium of exchange and unit of account, running on a blockchain network with the ability to complete cross-border transactions without restriction.	Bitcoin (BTC) XRP (XRP)
DeFi	“DeFi” refers to digital assets that support financial products and services that are not facilitated or controlled by any central entity. These financial products and services are accessible without any barrier to entry or identification requirements. All DeFi tokens must be created on smart contract platforms and offer open-sourced liquidity with the ability for token holders to reserve governance rights.	Uniswap (UNI) Maker (MKR)
Culture & Entertainment	Culture & Entertainment includes all projects that aim to decentralise social media platforms, create decentralised gaming worlds, and increase direct peer-to-peer interaction between content creators and their audience, while at the same time maintain user privacy, security, and ownership of data and digital assets.	Immutable (IMX) Gala (GALA)
Smart Contract Platform	Smart contracts are computerised blockchain protocols that execute terms of a contract. Smart Contracts represent computer code that ensures when the terms of the contract are met by both parties, it executes automatically, allowing for peer-to-peer trustless transactions. Smart contract platforms are designed for the building of decentralised applications, layer 2 scaling solutions, DAO’s, and custom protocols. Each platform utilises a native token for the payment towards building on the platform, providing liquidity, and allowing interoperability between the native token and newly created tokens built on the platform.	Ether (ETH) Cardano (ADA)
Digitisation	Digitisation refers to the process by which real world documents, contracts, public names, etc. are uploaded to a blockchain for the purpose of transparency, publicly verifiable ownership, and immutability. Proof of ownership, identity, and authenticity are valuable traits that are made possible by blockchain technology.	Ethereum Name Service (ENS) Galxe (GAL)
Stablecoin	Stablecoins are a set of protocols whose native token is pegged to a fiat currency, most commonly the US dollar. Stablecoin issuers may use one of several methods to maintain their peg such as 1:1 dollar-backed reserves, multi-asset treasuries, collateralized lending, or mint-and-burn mechanisms, etc. Stablecoins allow for frictionless transfer and exchange of fiat-pegged assets on the blockchain.	Tether (USDT) USDC (USDC)

Source: CoinDesk, June 2024.

Currently, two of the most common digital assets are Bitcoin (BTC) and Ether (ETH).

What is Bitcoin?

Bitcoin is a cryptocurrency. It can be used to buy and sell goods and services from individuals or companies that accept Bitcoin as payment. It can be thought of as a digital currency that has no intermediaries, such as central banks, behind it. Like currency on foreign exchange markets, investors can also trade and invest in Bitcoin on cryptocurrency exchange markets. While there are many other such cryptocurrencies these days, Bitcoin was the first and as of June 2024 remains the largest. [5]

The idea of Bitcoin was first introduced in a whitepaper published in October 2008, under the pseudonym Satoshi Nakamoto. Nakamoto proposed a solution that would eliminate the need for trust in financial institutions such as central banks to issue and control money, and commercial banks to facilitate, execute and approve transactions. This was made possible through the creation of digital tokens called Bitcoin, to function as digital cash. All transactions of Bitcoin between users are recorded anonymously on a public “ledger” called the blockchain.

The Bitcoin network was launched on 3 January 2009, with a coin price of zero. Since then, Bitcoin’s trading history has been wildly volatile, fluctuating between peaks and troughs.

What is Ether?

Ether is the native cryptocurrency used on the Ethereum network. Ethereum is an open-source platform running blockchain technology that is used for creating decentralised applications known as DApps. The network's users can create, publish, monetise, and use applications on the platform.[6] Ether is the cryptocurrency required to use the Ethereum network.[7]

It's common to use Ethereum and Ether (ETH) interchangeably, but Ethereum is a blockchain network and Ether is used as the cryptocurrency to transact on Ethereum

What are the risks?

Crypto-assets can carry significant risk and there may be different risks to consider depending on the type of crypto-asset an investor buys and where it is bought. Investors should read all relevant materials and consider seeking professional advice before making any investment decision.

Key risks to consider when investing in crypto include, but are not limited to, the following:

Crypto is largely not regulated: Many crypto-assets and other digital assets are commonly not considered to be financial products. In addition, the platforms where you buy and sell crypto may not be regulated. This means you may not be protected or have legal recourse if the crypto-asset issuer or exchange fails or is hacked.
Highly speculative and volatile: Investing in crypto-assets is highly speculative. The market value can fluctuate a lot over short periods of time, and is affected by things like media hype and investor opinion. There may be little to no intrinsic value in the cryptocurrency and due to its technical complexity it can be hard to understand.
Hacking, theft, and criminal activity: Thefts and cyber-attacks of crypto-assets can happen on exchanges where investors buy crypto or it can be stolen directly from the investors. Due to the unregulated nature of crypto, investors may have no recourse if this situation occurs. The use of crypto for illicit activity and scams can also have a negative impact on the reputation of cryptocurrencies.
Technically complex: Crypto-assets can be hard to understand. There is usually no product disclosure statement or prospectus that explains clearly how the crypto works. Developers may issue a ‘whitepaper’ to describe it, but these can vary in format and information. A crypto-asset’s code may not be available to review. Or it may be written in obscure computing language. The underlying code of the crypto may also change over time. To access a crypto network, you may need special software and need to know how transaction fees operate. Unfamiliar users run the risk of:
- sending a transaction to an incorrect address
- over-paying on transaction fees called ‘gas’ (sometimes by thousands of dollars)
- not paying enough for a transaction fee (and so losing the fee and transaction)
Environmental: Many crypto-assets require large amounts of energy consumption in order to operate. A material component of their energy usage is the proof-of-work consensus mechanism, a process undertaken by crypto-miners in order to achieve agreement, trust, and security across a decentralized computer network. While the energy-intensive nature of the proof-of-work process is leading to the creation of new and more efficient consensus mechanisms, such as proof-of-stake, at the time of writing Bitcoin and Ethereum both use proof-of-work.[8] In order to reduce their associated carbon emissions, crypto-asset miners are increasingly turning to renewable energy sources. [9]

For additional information on the risks of investing in crypto-assets refer to ASIC and MoneySmart websites.

How do you access or buy crypto?

There are two broad ways to get exposure to crypto assets:

Crypto Asset Exchanges: If you want to buy or sell crypto, opening an account with a cryptocurrency exchange is how many investors get started. Crypto exchanges function similarly to online brokerage platforms, providing you with the tools you need to buy and sell crypto like Bitcoin and Ethereum. When choosing a cryptocurrency exchange, it’s important to look at factors such as supported crypto-assets, fees, payment methods, security, and the custody and storage arrangements for your crypto.
Exchange Traded Funds (ETFs): ETF product issuers may offer access to ETFs that hold crypto-assets. When investors buy an ETF that is available on the ASX the units in the ETF can be held on the investors’ holder identification number (HIN) alongside their other investments, such as shares. When investing in an ETF that holds crypto-assets investors should read the associated product disclosure statement to understand the benefits and risks of getting economic exposure to the crypto-asset through the ETF structure.

Further information:

The world of crypto-assets is relatively new and exciting, however as with any investment it is important that investors understand the risks. Before investing, investors should remember some of the following fundamentals:

Do your research: Investors should understand what they are buying. For shares and ETFs this can involve reading the prospectus or product disclosure statement. Unfortunately many crypto-assets do not have the same regulatory documents, so be sure to do your research, read white-papers issued by the crypto issuer, and understand what entitlements (if any) investors have in the crypto-asset.
Understand your goals: Just as important as understanding what you are buying, you should also ask yourself why you are buying something. Is the investment to help you achieve a short, medium or long term goal? Are you trying to generate capital gains or income? Are you investing or speculating?
Invest what you can afford to lose: Given the high risk and volatile nature of crypto, investors should be prepared to lose what they invest.
Diversify: It is important that investors build diversified portfolios across all asset classes and understand what events will drive those asset classes and investments to rise or decline in value.
Seek financial advice: Investors should consider seeking financial advice before making an investment decision.