Things to note

Bitcoin tokens stand in front of an illustration of binary code.
Bitcoin tokens stand in front of an illustration of binary code. PHOTO: BLOOMBERG

SCAMS

DBS' Mr Sachin Mittal warns investors that they need to be wary of investing in introductory offers of new cryptocurrencies and relatively unknown ones.

CoinHako's Mr Yusho Liu notes that overvaluations are amplified when it comes to smaller cryptocurrencies and "they are often a get-rich-quick scheme".

SUSS' Prof David Lee says the value of the cryptocurrency lies in its ability to generate what is called a network effect, or, in simple terms, there must be demand and usability. He notes that if the cryptocurrency does not address the pain points of the fiat financial system - where the government made things like paper money with no value the legal tender - "and serve the under-served, then it is unlikely that the coin or token is sustainable in the long run".

Prof Lee adds that there is a high regulatory risk for many coins that serve no purpose but are purely for speculation and are a mere ponzi scheme.

RESEARCH BEFORE YOU LEAP

Know who is behind the cryptocurrency, says Prof Lee.

Mr Mittal adds that you should "ensure that the exchange has been in existence over a reasonable period of time and read a few user reviews to gauge the quality of the exchange".

RISK APPETITE

As with all other investments, don't invest money you can't afford to lose, says Mr Liu, who adds that if it sounds too good to be true, it probably is.

Mr Mittal notes that as there is no government or any form of authority backing or regulating these cryptocurrencies, they are often subject to heavy fluctuations. This is why investors should have a higher risk appetite to bear possible losses from steep price swings, he says.

Luno business development head Vijay Ayyar says having some of your investment in cryptocurrency, or the bitcoin more specifically, could provide massive outsized returns for the portfolio.

He adds: "The other way to do it is to buy some of it every month, a popular concept called dollar-cost averaging, as prices are quite volatile among cryptocurrencies since the industry is still in its infancy."

SECURITY MATTERS

Cryptocurrencies certainly require a high level of scrutiny. Prof Lee says you have to be a cyber-security expert to be able to protect your digital assets. "You may need to own devices such as a hard wallet that are mostly not connected in order to protect the private key, which is like a password to move your assets. If anyone gets hold of this private key, they can transfer the holding away."

Mr Mittal stresses the need for diligence concerning the security protocols that an exchange has in place. "An exchange with additional layers of security such as two-factor verification and cold storage - storage of data offline - is always preferable," he adds.

Citing the case of the Tokyo-based Mt Gox trading exchange in 2014, which was the largest in the world at the time, he says: "Poor security features could result in a repetition of the Mt Gox incident, where about 850,000 bitcoins valued at US$450 million at the time went missing after hackers broke into one of the most famous bitcoin exchanges in the world."

A version of this article appeared in the print edition of The Sunday Times on July 16, 2017, with the headline 'Things to note'. Print Edition | Subscribe