Cryptocurrencies are not issued by a State authority, such as a central bank or government. As such if your funds are stolen, no one is responsible for helping you get your money back. Your investment is also not protected by any sort of deposit guarantee scheme. Some crypto-currency providers may offer stablecoins. These try to reduce the volatile nature of the cryptocurrency by linking it to another asset, for example the Euro or Gold. There is however, no long term guarantee of the link.
Cryptocurrencies are unlike the money we carry around on a daily basis. For example the Euro is legal tender and must be accepted as payment for goods and services. The European Central Bank guarantees the Euro and controls its supply. There are protection schemes in place if a financial provider your money is with goes out of business
Be very careful of potential scams when it comes to crypto. Here are the most common scams to be aware of:
Social media
Crypto is often advertised in an unclear, incomplete, inaccurate or even misleading way. Social media ads may be very short, and focus on the potential gains but not the high risks involved. Beware of social media ‘influencers’ who may be paid to talk about certain types of crypto and so may be biased.
Wallet hacks
This happens when scammers get your login details and gain access to your funds. This is usually done by gaining access to documents on your laptop, emails or cloud storage. Never share your login with anyone under any circumstances. Ensure anywhere you store the login is secure.
Exchange hacks
This is when scammers steal email addresses and passwords. They can then log into your account and remove funds. Consider adding two-factor authentication to your account to increase your level of security.
Pyramid schemes
Some scams may be like pyramid schemes. These scams focus on people recruiting friends and family to invest in the crypto. Promoting or participating in a pyramid scheme is illegal under Irish law. You should be suspicious of any kind of crypto that encourages you to recruit people.
Fake Initial coin offerings
You should also be wary of fake “initial coin offerings” (ICOs). An ICO is a way of crowdfunding the launch of new currencies or companies. ICOs are not regulated and could turn out to be scams. The currency may not launch at all or it could launch and then the developers walk away from the project. The value of the currency falls and initial investments are wiped out.
Other types of scams related to cryptocurrencies could involve
- Significant restrictions around cashing in your currency
- Lack of access to the currency you have bought
- Incentives for you to invest more money
You can get cryptocurrencies either through
- Mining
- Buying one through a broker who deals with crypto
- Being given one in exchange for something.
Another common way to get cryptocurrencies is through cryptoexchanges. These allow you to trade crypto for other assets, like money or digital currencies.
When you get cryptocurrency, you keep it in a digital wallet (hosted and unhosted). This is a piece of software that can run on your computer, or usually on your smartphone.
Most digital wallets hold “public keys ” and are protected by “private key”. You should think of your “public keys” like your bank account number. You might want to share your public key in certain circumstances. Your “private key” is like a password, which you should never reveal to anyone. If you lose or forget your private key you will not be able to access to your crypto. It will be lost for good since, unlike your bank password, it is not possible to recover a private key.
In general, most people buy and hold crypto as an investment. You can use it to buy goods and services that accept cryptocurrencies, however, this is not very widespread. You can also convert your crypto-currency into standard currency using a crypto-exchange .
In March 2022 the Central Bank of Ireland warned about the risks of investing in crypto, This was part of a European-wide campaign by the European Supervisory Authorities. In particular, you need to be aware of the risks of misleading advertisements. These are often on social media, where influencers are being paid to advertise crypto.
You should be aware that cryptocurrency is not considered to be suitable for everyday use. A well-functioning currency has the following three functions:
- Store of value
- Unit of account
- Medium of exchange
Cryptocurrencies are, therefore, not suitable for the following reasons:
- Store of value– To be a store of value, a currency should be stable over time. Due to large fluctuations in value, this is not the case for cryptocurrencies.
- Unit of account– A unit of account means that the money should allow us to easily form an understanding of the value of goods and services. This allows us to compare them to each other. The volatility of cryptocurrencies makes it difficult to use as a unit of account.
- Medium of exchange -A medium of exchange means it should facilitate buyers and sellers to make transactions. In some ways, cryptocurrencies can do this – as buyers and sellers can use crypto to pay for goods and services but only in limited situations. In addition, some cryptocurrencies have slow transaction speeds and/or high transaction costs. Their volatility also makes it difficult for them to function as a medium of exchange.
In general, cryptocurrencies are more likely to be high-risk, than a standard currency.
Most cryptocurrencies have transaction charges for buying, selling and transferring currency. These fees can vary depending on the crypto-exchange used.
An investment in crypto is looked upon by Revenue in the same way that an investment in any other currency, stock or share would be. Every gain you make from crypto must be declared to Revenue for Capital Gains Tax. Revenue will require you to declare details including a description of asset, sales proceeds and the cost of acquisition.
