The beginners guide to investing in cryptocurrency – Bitcoin and Ethereum are back with a vengeance

Nearly three years after the bitcoin bubble burst, cryptocurrencies are booming again.

The value of Ethereum is up by two-thirds in the past four weeks and has nearly tripled since the start of the year, going from A$188 to $A547, while Bitcoins are trading at a one-year high of around A$16,500 or just under US$12,000 after languishing around US$9,000 for most of July.

It’s inspired another wave of enthusiasm in digital currencies with many punters predicting a further move upwards is possible.

Statistician Willy Woo recently tweeted that crypto market was in its “early main bull phase” just like the fourth quarter of 2016 – suggesting that the massive surges last seen in 2017 might ahead.

“We have reached a tipping point, I feel, where it has been knocking on the door of mainstream adoption for the longest time,” says Caroline Bowler, the chief executive of Melbourne-based BTC Markets, one of several Australian cryptocurrency exchanges.

“This is something we could see picking up a head of steam.”

So far there’s still not the same “out of control breathlessness that we saw in 2017,” when BTC Markets was adding hundreds of thousands of new clients a month.

Instead the growth has been more measured and the quality of the people getting involved is higher, said Ms Bowler, who comes from a traditional finance background including positions from Bank of America Merrill Lynch in Ireland and Singapore.

Part of what is driving the crypto craze this time is what’s known as decentralised finance – using the Ethereum platform to offer borrowing and lending products without intermediaries such as banks.

It’s complicated but the Ethereum operates as a kind of “global computer” where “smart contracts” can be written in code to execute automatically when certain conditions are met.

“The story of 2020 is Ethereum, because defi (decentralised finance) is based on Ethereum,” Ms Bowler says.

The value of Chainlink, a cryptocurrency used in decentralised finance, has increased more than fivefold since April.

Whether the bull run will continue is of course impossible to predict, and many overeager punters have lost their shirts gambling on cryptocurrency.

But enthusiasts say they are essentially taking part in an asymetrical, high risk/high reward bet on the future of the world’s financial system.

While cryptocurrencies remain difficult to use and intimidating to novices, there can be something thrilling about being in control of one’s own money.

HOW TO GET STARTED

Ms Bowler emphasises that she’s not an investment advisor but has this advice to anyone wanting to get started in cryptocurrency.

First, buy coins on an Australian exchange that’s registered with AUSTRAC, the Australian Transaction Reports and Analysis Centre.

That will mean that you’ll have to go through the same anti-money laundering/know your customer bureaucracy you would when opening a bank account – typically, providing a copy of your driver’s license or passport so the exchange knows who it is dealing with.

While those rules are a slight hassle, “they’re there to protect you,” Ms Bowler says.

Unregulated exchanges have been used by criminals or gotten hacked, as New Zealand’s Cryptopia exchange was in early 2019.

Aside from BTC Markets, other Australian exchanges with a good reputation include the Sydney-based Independent Reserve, Coinjar and Coinspot. US exchanges Coinbase and Kraken also accept Australian customers.

Second, Ms Bowler says to use what’s known as two-factor authentication, or 2FA, rather than just a password on your accounts.

With 2FA your mobile phone or an app on your computer generates a one-time code for logins.

Again, this is a slight hassle, but it is worth it to improve the security of one’s account. Because no one controls cryptocurrency, it’s essentially impossible to recover funds that are stolen if hackers guess your password, so you want to make things as secure as possible.

Third, do your own research and make sure you understand the cryptocurrency you’re buying and the reasons you’re buying it.

“Get comfortable with you’re investing in – and go forth and multiply,” Ms Bowler says.