The volatile price movement of bitcoin has been attracting thousands of South African investors since its inception in 2009.
However, the South African Reserve Bank (SARB) has issued several warnings regarding the risks associated with Bitcoin and other Cryptos and is planning on regulating the industry.
Despite the risks, SA investors are investing millions into BTC & Cryptos as per reported volumes by major exchange Luno. Industry backers & enthusiasts for years have been pushing for its legalization, to promote a safer environment for investors.
We look at how South Africans can invest in Bitcoin and what are the risks associated with it.
What is Bitcoin?
Bitcoin is the first cryptocurrency of the world which is also regarded as a virtual or digital currency. The cryptocurrency is a type of money that cannot be touched or felt but only exists on the internet.
Bitcoins exist in a digital wallet of its owner which can be sent to the digital wallet of another owner. Each transaction or transfer is recorded publicly in a list called as blockchain. Due to a recorded history of each transaction, it is impossible to make a copy of or undo any transaction.
The value of bitcoin, like any other currency, is based on news, speculation, transactions by major holders, and many other factors. Compared to traditional or fiat currency, cryptocurrencies are highly volatile and show turbulent price movements.
Bitcoins can be bought and sold in return for traditional currency at underlying prices. It can also be created using a computer by solving complex mathematical problems known as bitcoin mining.
The value of 1 bitcoin in November 2016 was nearly ZAR 10,000 which almost went up to ZAR 264,000 in November2017. Bitcoin trading and investing are ideal for speculatorsseeking high returns in a short span.
Ways to Invest in Bitcoin
Bitcoin Investing has been gaining tremendous popularity in recent years. The trading volumes have increased and decreased over the years since its inception.
Nevertheless, the multi-bagger returns in the past continue to attract millions of new traders and investors.
Bitcoin investments can’t be called investments in a traditional sense as they are more of speculative nature.
There are multiple ways South Africans investors can trade or speculate on bitcoin.
#1 Through South African BTC Exchange:
Bitcoins can be bought from the local BTC exchanges with ZAR which can either be stored in the exchange account wallet or the bitcoin wallet on your device. The buyers have to pay the ZAR price of bitcoin set by the exchange. The bitcoins can later be sold to book profit or loss.
This method is quite popular in South Africa as any individual without any specialized knowledge can trade in bitcoin and speculate on the price movement. There are multiple exchanges in South Africa like Luno, Ice3X, VALR that allow bitcoin trading. These exchanges are self-regulated and charge different fees for the trades.
#2 Through CFD Brokers in South Africa:
The price movements of bitcoin can also be speculated without actually owning the bitcoin through Contract for Difference (CFD). The CFD brokers in South Africa offer CFDs on bitcoin and many other instruments.
Many of the popular bitcoin CFD brokers in South Africa are regulated by the Financial Sector Conduct Authority (FSCA) which enhances investor safety under the ODP & Derivatives regulations. These brokers also offer leverage and margin trading that allow traders to open a larger position with a lower amount.
Like Plus500 which is popular in SA offers CFD trading on 11 Cyptos is also regulated by FSCA, FCA & ASIC.
The user-friendly trading platforms like Metatrader and cTradermakes it the most convenient method to trade bitcoins for South African investors, though it requires some prior experience in online trading.
On-Boarding process is often simple with these brokers as individuals only need to open an account, complete their verification and deposit the minimum amount to start trading in the bitcoin market.
#3 Through BTM/VTM (Bitcoin ATM):
Bitcoins can also be bought and sold through the ATM machine known as Bitcoin Teller Machine or Virtual Teller Machine. User needs to have the bitcoin wallet in smartphone whose QR code has to be scanned to make deposit or withdrawal instantly.
Currently, there are 10 Bitcoin ATMs in South Africa in cities of Pretoria, Johannesburg, Cape Town, and Durban. Some of the Bitcoin ATMs do not allow withdrawals while deposits can be done at any BTM/VTM. Nearest Bitcoin ATM can be found online.
#4 Get Paid in Bitcoin:
Bitcoin is also gaining popularity as a medium of exchange for products and services among business & individuals. The cryptocurrencies can be transferred into the wallet for the products and services offered which can later be used to make further purchases of goods/services or can be withdrawn or speculated for better gains.
There are several gateways like CoinBase, Bitpay that help merchants sell their services or goods using Bitcoin and other Cryptocurrencies.
Bitcoins can also be gained by verifying the transaction and securing the network for the blockchain. This process is also called as bitcoin mining. However, it is a complex process and requires a specialized group of computers.
There are also various communities that connect various buyers and sellers of bitcoins privately. The buyer and seller can meet or connect online to settle for a deal to trade bitcoin. This method is quite prone to fraudulent and theft hence the traders need to be careful.
Risk of Investing in Bitcoins
Bitcoins are highly volatile and are prone to exhibit dramatic price movements. Investment in bitcoin involves significant risk due to multiple reasons.
1. Volatility and Unpredictable Price Movements:
Bitcoin is one of the most volatile trading instruments in the world. It does not fall under the jurisdiction of any particular country. Hence, any regulatory news or any economic or non-economic event throughout the world can have a major impact on the price movement of bitcoins.
The trading as well as mining of bitcoin, never halts and the market remains functional 24*7 for 365 days in a year. This makes it hard to predict or keep a track of the market as the prices can move at any time of the day dramatically.
Price swings are also affected by considerable transactions by major holders. Each bitcoin transaction is recorded on a blockchain but the identity of the payee or recipient is well hidden. It is nearly impossible to predict a major transaction or it’s possible impact on the bitcoin market.
2. Security Risk & Risk of Being Stolen:
Bitcoins are virtual currency that only exists on the internet. It has no physical significance which makes it open for cyber thefts. The bitcoin wallet in an exchange or a personal device can be hacked to transfer the bitcoins. If the key to a wallet is somehow lost or hacked, it is nearly impossible to retrieve the key or the lost bitcoins.
The Japanese bitcoin exchange Mt. Gox was hacked during the period of 2011 and 2013 and nearly 600,000 bitcoins were stolen. It is considered the largest bitcoin heist to date which brought down the value of bitcoins to lowest levels. Such incidents are still a common occurrence despite security measures.
3. Scam by Fake Exchanges or Brokers or Investment Schemes:
Scams and frauds are quite common in the unregulated world of cryptocurrencies. Bitcoins are accepted as modes of payment by various firms and exchanges but some of the exchanges or the receivers can be fake.
Once a bitcoin is transferred to a different wallet, it can neither be retrieved nor a complaint can be filed against the fraudster. This type of risk can be mitigated by selecting a trustworthy exchange and avoiding unknown entities accepting bitcoins.
Due to little or no regulation, Bitcoin investment involves significant risk and is not ideal for conservative investors. Cryptocurrencies were introduced nearly 10 years ago and are still developing into a more reliable medium of exchange.
It cannot be said what values does it hold in the future but suitable individuals can take advantage of the price swings with caution and due diligence.
Is Bitcoin legal in South Africa?
Yes, but The South African Reserve Bank (SARB) has warned against the risks involved in buying and selling of bitcoins for any purpose. Although, there is no ban on any form of buying and selling of bitcoins in South Africa. The profits made with bitcoin trading are liable for taxation.
The top regulatory authorities in South Africa, along with SARBhave taken an initiative to regulate the cryptocurrency trading by issuing certain recommendations for the regulatory framework.
To keep the cryptocurrency trading clean and safe from money laundering and terror financing, the regulators have issued 30 recommendations in compliance with standards of Financial Action Task Force (FATF). The top regulators included Financial Sector Conduct Authority (FSCA), National Credit Regulator, South African National Treasury, South African Revenue Service (SARS), and South African Reserve Bank (SARB).
Bitcoin trading is legal and can be done by any individual in South Africa. However, it involves high risk and unpredictable price movements. Buying and selling bitcoins from a personal wallet further adds on to the risk factor. For beginners, it is advisable to start with bitcoin CFD trading from a well-regulated broker in South Africa.