Should you invest in cryptocurrency and ICOs?

With a ten-fold increase in the value of Bitcoin over the past year, the increasing stabilisation of so-called “altcoins” like Ethereum and Ripple, and the exploding Initial Coin Offering (ICO) market, it’s a boom time for cryptocurrency.

However, New Zealand has been slow to catch on – particularly our government and banks. As I explained in a previous column, the local banks have been cracking down on bitcoin exchanges and anyone who has significant dealings in cryptocurrency.

Although the situation is slowly improving, buying and selling cryptocurrency in New Zealand remains problematic.

Cryptopia, Kiwicoin, NZBCX, BitPrime and newcomer Dasset are some of the local operations that allow you to trade bitcoin (and sometimes altcoins). So there are kiwi services out there, but the problem is their relationship to our banks. For example, two weeks ago NZBCX was “forced” to suspend bank deposits. It appears they’re back up and running now, but this kind of uncertainty isn’t good for anyone.

Partly for this reason, experienced cryptocurrency traders in New Zealand tend to favour international exchanges like Poloniex and Independent Reserve. They also claim to get better rates that way. However, trading through overseas exchanges comes with its own set of risks. You’ll need to factor in often opaque foreign exchange rates and trust that an unknown foreign party will handle your money correctly. If there’s any problem, you’ll have no legal recourse.

This is why it’s key for New Zealand going forward that our government paves the way for local cryptocurrency exchanges to flourish.

Of course there’s much more to cryptocurrency than just trading it. The ICO market is particularly interesting and presents opportunities for kiwis – albeit risky ones.

An ICO is a way for startups to raise capital. The name is a variation of IPO, in which a company raises money by listing on the sharemarket.

The basic idea around ICOs is that you purchase “tokens” in a startup, either for fiat currency or with virtual currency. One thing to bear in mind is that these tokens don’t necessarily equate to shares in a company. Depending on the terms of the ICO, the tokens may just give you early access to the startup’s product. Each ICO is different, so do your due diligence very carefully.

Despite the risks, cryptocurrency startups have raised huge amounts of money via ICOs this year. One of the biggest was, a decentralised messenger app that reportedly raised more that US$100M.

That was partly thanks to New Zealand consultancy BlockchainLabs.NZ, which helped prepare its ICO. In a recent press release, BlockchainLabs.NZ said that it helps companies like “develop and stress-test the codebase” before an ICO is unveiled to the public.

Both cryptocurrency and ICOs have attracted the scrutiny of the New Zealand Financial Markets Authority (FMA). In early November, the FMA released a statement saying that “all tokens or cryptocurrencies are securities.”

Basically that means tokens and cryptocurrencies will have to comply with local regulations for financial markets. I view that as a good thing, because it offers some protections to consumers. It’s similar in a way to how the American Food and Drug Administration intervened to regulate personal genetics startup 23andMe.

Also to its credit, the FMA seems open to encouraging innovation. An FMA representative told the bitcoin news site Coindesk that its aim is “balancing innovation against consumer protection and ensuring the regulatory regime remains relevant and agile.”

Already the FMA has stepped in with harsh words for a local ICO, Sell My Good. After a NZ Herald investigation turned up irregularities, an FMA spokesman recommended that New Zealand investors “do not subscribe to this offer.” A few days later, Sell My Good withdrew its ICO.

Boom times on the Internet inevitably attract bad actors. After all, there were plenty of sheisters in the Dot Com boom. However, there was also

Likewise, there will be some huge winners to come out of this “wild west” era of cryptocurrency.

American Venture Capitalists are already making adjustments to the way they do business. Michael Arrington, who founded the tech blog Techcrunch, has just announced the first cryptocurrency hedge fund. Notably, the fund is denominated in one of the leading altcoins: XRP.

Not only will the majority of the fund’s transactions be done in XRP, a cryptocurrency developed by a startup called Ripple, but Arrington XRP Capital will also pay its own fees and salaries in XRP too.

This type of cryptocurrency fund could be great news for New Zealand investors, since it routes around the international banking system. As Arrington nicely put it, “no need to rely on ancient fiat methods for cross-border currency transfers that are slow and laden with fees.”

So yes, the cryptocurrency market is bursting with potential. Depending on your appetite for risk, it could be a worthy investment.

But don’t forget about those risks. I encourage you to read the FMA’s advice for investors and carry out your own due diligence – especially with ICOs.