Is crypto a good investment? Understand the risks and rewards of crypto

A recent 2023 study by KPMG highlighted that Canada’s investment sector is warming up to crypto. The report found that 22 percent more of the surveyed financial services providers in Canada offered crypto-asset services than in 2021.

However, crypto’s potential for higher returns comes with a significant risk of greater losses. Unlike conventional investments, the very characteristics that make crypto attractive also make it inherently risky. And this risk extends beyond price volatility – including vulnerability to scams.

Understanding the basics of crypto, the associated risks and what makes it an easy target for scammers is essential for anyone considering entering this rapidly changing market.

What is the idea behind crypto?

Cryptocurrencies are part of a wider movement to create a financial system that is open, borderless, decentralized and immutable. Proponents of crypto believe that the system will foster a culture of financial transparency and collaboration that will enable rapid innovation and development.

Although commonly called ‘cryptocurrencies’, the term can be misleading. In Canada, cryptocurrency is not recognized as legal tender under the Currency Act. The term “crypto-asset” more accurately encompasses the common types of digital assets you may encounter, including utility tokens, payment tokens, virtual assets, digital currencies, or stablecoins.

Is crypto trading legal in Canada?

Crypto trading is allowed in Canada, but not all crypto assets are considered securities. But that does not mean that investor protections afforded by securities laws do not apply to them.

To protect Canadian investors, as of January 2020, the Canadian Securities Administrators (CSA) has asserted jurisdiction over Crypto-Trading Platforms (CTPs), commonly known as crypto exchanges, operating in Canada. Accordingly, all CTPs in Canada must be registered with the Alberta Securities Commission or another provincial securities regulator.

Crypto’s benefits and risks

Over the years, crypto’s rise to prominence can be attributed to several factors. First, its decentralized nature enables peer-to-peer transactions without the oversight of a trusted third party such as a traditional financial institution. Cutting out central authorities overseeing transactions reduces fees and speeds up processing times Second, due to its highly speculative nature, investors may be attracted to the potential for higher profits, using it as a way to diversify their portfolio or making quick short-term profits.

But this allure also brings inherent risks.

Why is crypto prone to scams?

Decentralization and lack of regulatory oversight: The principle of decentralization is fundamental to crypto. However, the lack of oversight can also weaken investor protection.

Investors often use crypto exchanges to buy or trade crypto. In Canada, any platform that trades crypto-assets must be registered with the ASC or another provincial Canadian securities regulator. Unregistered platforms may not comply with securities legislation, including providing false information and lacking investor protections such as safe handling of client funds, safe custody of client assets and measures against market manipulation.

Given the borderless nature of crypto and the benefit of anonymity, in case of fraud, crypto sent to unregistered platforms in foreign jurisdictions can never be traced back.

Price Volatility: Crypto is known for its frequent and significant price fluctuations. These extreme swings often attract investors hoping for quick, short-term gains. However, the highly speculative nature of the asset class, which is heavily influenced by market sentiment, also creates opportunities for scammers to deploy their schemes.

While scammers often repurpose traditional investment scams such as pump and dump or ponzi schemes by incorporating a crypto element, common crypto scams include:

Rug pulls: Rug pulls, which get their name from the expression “pull out the carpet,” involve luring investors with a new crypto project and withdrawing all funds before the project is built, leaving the investors with no balance in the pool doesn’t leave. These scams can sometimes include elements of a Ponzi scheme, where investors profit by recruiting other users with false financial promises.

Fake Initial Coin Offerings (ICOs): Fraudsters often create fake ICOs, where a new crypto product is launched and sold to investors. These fake ICOs may have websites and white papers that look professional, but ultimately offer nothing of value, leaving investors with nothing but empty promises.

How to invest in crypto in Canada?

Before you commit to putting your hard-earned money into an investment, whether traditional stocks and bonds or crypto trading, always do your research.

Check: whether the investment matches your risk tolerance; if the crypto-asset trading platform you choose to use is registered with the Alberta Securities Commission; and if you understand the business.

As every crypto enthusiast knows, thorough research, referred to as “do your own research” DYOR is critical. It can help you understand the risks and opportunities, invest appropriately and avoid scams.