Thinking about buying or trading crypto? The crypto asset market has become easily accessible and it might feel like everyone is getting in on it – but that doesn’t mean crypto is the best investment for you.
Keep reading to learn the ins and outs of trading crypto assets, including how to buy crypto assets wisely, and how to determine if crypto is right for you.
What are Crypto Assets?
Crypto assets are a type of digital asset. They use cryptography, peer-to-peer networking, and a public ledger to create new crypto offerings, and verify and secure transactions without a middleman or bank. Crypto assets often have one or more of the following properties:
- A medium of exchange (similar to fiat currencies);
- A function that’s specific to the business or issuer; or
- An ownership or profit interest in a business.
Let’s break down the jargon surrounding crypto.
Many people use the term “cryptocurrencies” when referring to crypto assets. However, while many crypto assets are digital mediums of exchange (and therefore act similar to currencies), not everything that’s referred to as a cryptocurrency is a digital medium of exchange, but could be a crypto asset with other properties. In addition, it’s arguable that no crypto asset can (at least for now) be described as a currency; although some vendors may accept them as payment, they’re not generally accepted as a medium of exchange in the way that traditional currencies are.
You’ve probably heard of Bitcoin; that’s because this is the most well-known crypto asset and the first to be mined in 2009. However, the crypto market has evolved quickly, with new types of crypto assets gaining traction with investors. Other crypto assets available today include non-fungible tokens (NFTs), stablecoins, and crypto funds like crypto exchange-traded funds (ETFs).
Is Crypto Right for You?
Crypto is often viewed as an opportunity to get rich quick. But remember, investing in crypto comes with high risk. You could lose some or all of your money.
In order to know if crypto is right for you, it’s important to know your financial self, which means understanding your financial goals, risk tolerance, time horizon, and investment knowledge. You can gain insights into your financial self by thinking about how you would react if your investments lose money or if you can be easily convinced to invest in a high-risk, high-return investment.
Remember – all investments come with risk. Generally, the higher the potential return an investment might offer, the higher the risk. When you take on greater investment risk, there’s no guarantee that you will actually get a higher return.
So what is risk tolerance and how does it relate to you when it comes to crypto?
Your risk tolerance is the level of variability you are comfortable with in order to achieve your investment goals, and it’s different for each person. So take the time to understand your risk tolerance, and don’t jump into something too quickly and fall for FOMO (fear of missing out). While crypto assets are a hot item, you should consider how they fit into your investment portfolio and your overall financial goals. In the end, you may feel it’s not the right investment for you.
How do you Buy Crypto Assets?
The most common ways to buy crypto are through crypto asset trading platforms, initial coin offerings (ICOs), and kiosks.
So, how does it all work?
Crypto assets only exist on the blockchain. The only way they can be accessed and used is by knowing the private key associated with the address that the blockchain says is the owner of the assets.
When you buy crypto assets, you don’t download or hold them as a file on your own device – you hold the assets in a digital address on a blockchain. Wallets are technologies or products that help you manage the keys associated with your assets on the blockchain.
Your digital wallet comes with an assigned public key and a private key analogous to a code. Always keep your private key – generally comprising a long string of numbers and letters – in a secure place; if it gets lost or stolen, you can’t regain access to the crypto assets in your digital wallet.
Digital crypto wallets can be hot or cold. A hot wallet connects to the Internet, unlike a cold wallet which stays offline. Because a cold wallet isn’t connected to the Internet, it’s generally considered a safer option to store your crypto because it’s less prone to being hacked and/or shared. With that said, if a cold wallet is misplaced or destroyed then anything stored in that wallet (such as private keys) also ceases to be accessible.
Crypto Asset Trading Platforms
Depending on how you bought the crypto, you may hold the private key directly or the crypto asset trading platform may hold the private key on your behalf. The crypto asset trading platform may delegate holding the private key to a third party service known as a custodian. Anyone who knows the private key associated with your crypto assets can access and trade them on the blockchain.
If you don’t have sole possession of your private key, you’ll need to rely on the crypto asset trading platform or any custodian it works with to keep the key safe and make transactions on your behalf.
ICOs are a way for companies to raise money using cryptocurrencies. To run an ICO, a company sells its own coins or tokens to the public. Often the issuer writes a white paper or article describing its plans and uses for the ICO’s proceeds.
These documents are not prospectuses, which are disclosure documents required by securities laws. For this reason, ICO documentation may not present all of the important details about the offering you should consider before making an investment.
You generally buy into an ICO with another cryptocurrency, such as Bitcoin or Ether. Sometimes ICOs allow purchases with a government-backed currency, like Canadian dollars.
In return, ICO issuers create digital coins that can have a range of uses. Sometimes the coins can only be used to purchase the company’s products and services. In other cases, the coins exist to hold value relative to other cryptocurrencies.
The function of the coin may be a factor used to determine if the coin is a security.
Some companies offer crypto for sale at a physical kiosk, often branded as an ATM (automated teller machine), which lets you insert cash in exchange for crypto assets. If you already have a public key, the kiosk can send your crypto to that public key; otherwise, the kiosk often can assign you new public and private keys and then print these keys off for you on a slip of paper.
Kiosks are not regulated. Before purchasing crypto at a kiosk, make sure you understand the fees you’re being charged. Keep any private keys you receive secure, and do not share them with anyone.
What you Need to Know About Crypto Asset Trading Platforms
Many platforms that are currently carrying on business in Canada are not registered with securities regulators. When a platform is registered, it means there’s an added layer of investor protection. Just as you should when searching for a registered investment professional, it’s in your best interest to conduct a background check on any crypto asset trading platform that may be of interest to you. You can check to see if the platform you plan to use is registered by conducting a search on the Canadian Securities Administrators’ (CSA) National Registration Search. It’s smart to use platforms authorized to do business in Canada, as well as to avoid using platforms banned by Canadian securities regulators.
If you’re looking for a crypto asset trading platform, here are some questions to consider.
1. Is the platform registered in Canada?
To comply with Canadian securities laws, crypto trading platforms must be regulated by a Canadian securities regulator. This means these platforms must register with provincial or territorial securities regulators and abide by certain conditions to help protect investors. The search tool noted above will indicate if a platform is registered.
2. Has the platform signed a pre-registration undertaking (PRU)?
Crypto trading platforms operating in Canada while they pursue registration are expected to make commitments to their principal regulator in the form of a PRU, which includes terms and conditions consistent with requirements currently applicable to registered platforms. A current list of crypto trading platforms that have filed PRUs is available on the CSA website.
Filing a PRU does not guarantee a platform will be granted registration. However, platforms that sign PRUs agree to implementing important investor protection practices. These commitments are generally consistent with the requirements currently applicable to registered platforms.
3. Where are the crypto assets kept – in your own wallet or on the trading platform?
It’s important to know where crypto is stored. Remember, crypto is kept in a digital wallet that comes with an assigned public key and a private key.
You should understand where the crypto is stored and how to access it. If it’s stored with the crypto asset platform, be sure you know what safeguards the trading platform uses. And remember, you should never give your private key to anyone.
4. Is the crypto trading platform traditional or decentralized?
Make sure you understand how transactions are carried out on the crypto trading platform. There are risks with both decentralized finance (DeFi) and traditional finance (TradFi). You need to be comfortable with the risk you may lose your money due to errors, bad code, or fraud.
For a crypto asset trading platform to be registered in Canada, it needs to meet similar standards (designed for your protection and to promote stability in our investment markets) that apply to every other investment dealer in the country.
What are the Risks of Investing in Crypto?
Crypto prices can be very volatile, meaning they can increase or decrease by large amounts many times a day. It’s often not clear what causes the value to go up or down. You risk losing all of your money at any time – without warning.
In addition to being highly volatile, crypto can be vulnerable to fraud, manipulation, and cyberattacks.
While most traditional investments have an underlying asset, such as an interest in a company’s future earnings, crypto has no such underlying asset.
Some crypto assets fall under BC’s securities law, while others may not. Crypto assets that are securities or derivatives and crypto-related products (like Bitcoin ETFs) and crypto trading services (like crypto asset trading platforms) may be regulated by provincial or territorial securities regulators if they are sold or marketed by or to Canadians.
Crypto asset trading platforms that offer trading in derivatives or securities to investors located in BC, or operate from BC to investors elsewhere, must comply with BC securities rules and regulations.
Beware of Crypto Scams
The nature of crypto means investors could fall victim to investment fraud in a number of ways. For instance, a fraudster may claim they will use your money to buy cryptocurrencies, and then cut off all communication once you’ve sent them money. Scams could include fake investment products, false websites claiming to sell packaged investments, and fraudulent cryptocurrency exchanges. Learn more about the common characteristics of a crypto-related scam.
The BC Securities Commission’s (BCSC) Enforcement Division continues to see websites targeting investors with packaged cryptocurrency or forex products. These websites are cheap for fraudsters to build, are often aggressively promoted on social media, and share two common traits: pre-set investment packages and unrealistic profits. The BCSC continues to warn the public the people behind these sites use sophisticated tactics to try and rope investors into fraudulent schemes. Learn more about these websites and how to protect yourself by watching this video.
Always check the registration of any crypto asset trading platform before opening an account or giving money to them. Checking registration helps protect you from unqualified or possibly fraudulent individuals and companies. You can also easily check to see which platforms are currently authorized to do business in Canada, as well as those that are banned by Canadian securities regulators.
Report a Concern
If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Inquiries at 604-899-6854 or 1-800-373-6393, or through email at [email protected]. You can also file a complaint or submit a tip using the BCSC’s online complaint form.