Understanding The Risks of Cryptoassets
Written by Kelley Keehn
Friday, July 27th, 2018
Are you wondering about getting on the Bitcoin bandwagon? Has the whole cryptocurrency craze been tempting you to invest in this trend? If so, the Ontario Securities Commission (OSC) wants you to know a lack of understanding of cryptoassets could put investors at risk.
Definition of Cryptocurrency:
A digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.
"It's important that investors understand the potential risks and characteristics of purchasing a cryptoasset product," said Tyler Fleming, Director of the Investor Office at the OSC. "We want to remind Ontarians to ask questions and read disclosure documents carefully to know what they are investing in."
The OSC recently minted their Taking Caution: Financial Consumers and the Cryptoasset Sector study and found that five per cent of people in Ontario own cryptoassets. The province's large population means that even small percentages can collectively translate into substantial numbers. Based on recent population estimates, the five per cent ownership figure translates into more than 500,000 Ontarians currently holding at least some cryptoassets.
Other provinces should take note as well, since this isn't just a temptation for people in Ontario. The study also found that men aged 18 to 34 are more likely to own a cryptoasset than any other demographic group.
Students Are Doing What with Their Student Aid?
Can you also believe that 1 out of every 5 students in the United States are using their student aid proceeds to buy Bitcoin and other cryptocurrencies? That's according to a recent survey of college students commissioned by Student Loan Report. The findings suggest that possibly hundreds of thousands of students put their extra money or money earmarked for food and housing into a risky bet. And with all the news about its wild growth in the past couple of years, it's certainly a tempting wager for many not wanting to miss out.
Fleming says the OSC is concerned for all Canadians about this speculation because "cryptoassets raise investor protection concerns relating to volatility, transparency, valuation, custody and liquidity, as well as unethical practices and illegal schemes and low consumer understanding of cryptoassets. We conducted this research to better understand how financial consumers are using cryptoassets, how well they understand these products, and how much risk they're taking."
The OSC report further noted that "most Ontarians are approaching cryptoassets with caution, but this isn't the case for everyone. Our survey results indicate tens of thousands of Ontarians may be taking significant, highly risky bets on cryptoassets—bets that may have a substantial impact on their financial wellbeing."
Understanding Your Investment
It's very important to understand the type of investment you're getting into and how it fits into your overall diversification. But many people ignore the basics and turn a blind eye to their personal finances due to confusion, a lack of knowledge or simply being overwhelmed. A recent survey found that 29%1 of Canadians say they're overwhelmed with their financial options. No wonder some Canadians are turning to cryptocurrencies even though they might not fully understand the risk involved.
What Should You Do?
Tyler suggests that "before investing in any security, it's important to understand what you're investing in and what protections are available. We want to remind consumers to ask questions about any investment and read disclosure documents carefully to know what they're investing in."
The OSC has published resources for investors on the cryptoasset sector at GetSmarterAboutMoney.ca.
1. Financial Planning Standards Council Financial Blind Spots survey