Pros and cons of cryptocurrencies

Retail giant Pick n Pay this week became the first major retailer in the country to announce it will accept cryptocurrencies for payment at some of its stores.

The retailer said: “Increasingly cryptocurrency is being used by those under-served by traditional banking systems, or by those wanting to pay and exchange money in a cheaper and convenient way. Many companies are responding to this by accepting Bitcoin.”

The move by Pick n Pay follows hot on the heels of the announcement by the Financial Sector Conduct Authority (FSCA) that crypto assets will now be regarded as financial products. This means digital assets such as Bitcoin will now be under the purview of regulators.

There are a few cryptocurrencies in the market like Bitcoin, Ripple, Litecoin and Ethereum. As the term crypto suggests, this is not like the cash we carry. The assets exist electronically and use a peer-to-peer system.

While the move by Pick n Pay gives confidence to people who trade in digital currencies, the FSCA warned that while cryptocurrencies should be embraced, consumers must also understand the risks.

Wiehann Olivier, a partner and digital asset lead at Mazars in South Africa, said any financial or non-financial investment has an element of risk associated with it and an investor can either accept the risk, try to mitigate it or avoid it
entirely. However, to do any of these, the risks must first be understood.

Cryptocurrencies are extremely volatile assets and are well known for their ability to generate potentially high returns or significant losses.

The FSCA answers some of your burning questions:

What is a digital currency and how does it work?

  • A cryptocurrency is a digital or virtual currency that is underpinned by blockchain technology.
  • A cryptocurrency is difficult to counterfeit because of this security feature and the complex blockchain technology.
  • A defining feature of a cryptocurrency is its organic nature. Members of the virtual community agree to accept digital currency units as a representation of value in the same way that currency is accepted.

Cryptocurrency pros and cons

  • Cryptocurrencies make it easier to transfer funds between two parties; these transfers are facilitated through the use of public and private keys for security purposes. These fund transfers are done with minimal processing fees.
  • Central to the genius of Bitcoin is the blockchain it uses to store an online ledger of all the transactions that have ever been conducted using Bitcoins, providing a data structure for this ledger that is exposed to a limited threat from hackers and can be copied across all computers running Bitcoin software.
  • However, because cryptocurrencies are virtual and do not have a central repository, a digital cryptocurrency balance can be wiped out by a computer crash if a backup copy does not exist.
  • Since prices are based on supply and demand, the rate at which a cryptocurrency can be exchanged for another currency can fluctuate widely.

“With regulations on cryptocurrencies in its infancy phase, it becomes paramount for investors to read their terms and conditions and examine their investment products to determine their level of exposure from a counter-party and rehypothecation risk perspective, then decide whether this is acceptable to their risk appetite,” Olivier said.

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