Understanding cryptocurrency

While cryptocurrency and crypto assets—or "crypto" for short—have been making headlines for a number of years, their existence, roles and regulations are still the subject of regular discussion. These digital assets have fluctuated wildly in price since their introduction, meaning that some investors win big and others lose it all. In this article, we'll look at what they are, how they work and what the risks are. That way you'll be able to decide for yourself if you want them in your investment portfolio.

Cryptocurrencies and crypto assets can play different roles in different circumstances. In countries with limited banking infrastructure, for example, crypto can be used to make transactions that are otherwise unavailable. Under oppressive regimes and in political conflicts, investors can use crypto as a safe harbour. And of course, in industrialized countries, investors buy and sell crypto to make a profit.

Cryptocurrencies are digital assets that have no physical counterpart. They aren't controlled by a central bank or government. Instead, they rely on a decentralized network of users. They're generally traded on online platforms—the equivalent of a stock market—and are held in digital wallets that can be controlled by you or by the online platform. You can also send crypto directly to someone else without going through a financial institution or other intermediary.

Unlike regular currencies, which fluctuate based on their country's economy, or shares that reflect a company's performance, cryptocurrency values are determined mainly by supply and demand. Analyzing the value and potential demand for a crypto asset is complicated. And, for example, it's easier to analyze Bitcoin and Ethereum, since they account for about 60% of the total market. Brand new crypto assets are harder to assess.

Cryptocurrencies can gain and lose a lot of value in a very short period of time for no clear reason. While major stock markets have systems in place to "short-circuit" any sudden plunges and prevent investor panic, crypto asset trading platforms do not. 

The highly speculative nature of cryptocurrency means people can take advantage of the system for their own gains. For example, people can artificially inflate demand for a short while by spreading false information, launching a media campaign or including a celebrity endorsement.

Digital wallets are relatively complex and can be hard to use. And the CTPs that host the data aren't always secure. Investors could lose all of their digital assets if their accounts are hacked.

What's more, if a cryptocurrency company or trading platform goes bankrupt, the crypto assets you hold are not protected by the Canada Deposit Insurance Corporation. 

• Get information from reliable sources, like the websites for the Ontario Securities Commission, the Autorité des marchés financiers in Quebec, or the equivalent organization for your province or territory. Don't make any investment decisions based solely on online ads or celebrity endorsements.
• Only use platforms that are authorized to do business in Canada.
  Make sure that the crypto asset trading platform is registered as a broker with the Canadian Securities Administrators. The list of registered brokers is linked above. You might also decide to purchase crypto ETFs instead of purchasing and managing crypto assets on your own. While this doesn't eliminate all of the risks associated with crypto assets, registered platforms and fund managers are subject to some requirements and verifications.
• Watch out for fraud attempts.
  In general, be on the alert in situations where you're asked to act quickly, or if you're promised abnormally high returns, or if you spot any of the other signs of investment fraud.
• Declare your crypto asset gains.
  Discuss your investment plans with your accountant—that way you'll avoid any unpleasant surprises during tax season!