In mid-August 2017, academician Prof. Bitange Ndemo made a bold public investment recommendation. He said that it was time for Kenyans to quit their obsession with investing in land and instead focus on investing in virtual currencies such as Bitcoin. At the time, the price of one Bitcoin was $4,000 (Sh432,000), having risen from $2,000 (216,000) at the start of August 2017.
A few months later, in January 2018, Cabinet Secretary for ICT, Joe Mucheru revealed that he had made a huge profit after investing in Bitcoin. The price of Bitcoin had risen from $2,000 (216,000) to about $11,100 (Sh1.2 million). Today, the price of one Bitcoin is about Sh6 million. As Bitcoin continues to cause ripples in the world of investment, many people are wondering how they can get a piece of the pie if cryptocurrencies are worth investing in, the risks, and the scams involved.
What are cryptocurrencies?
According to George Mangs, a cryptocurrency investor in Kenya and the founder of the financial platform MarketCap, cryptocurrencies are digital or virtual currencies or coins that are secured through a system known as cryptography. "Nearly all cryptocurrencies are derivatives of decentralised networks. These networks are based on a technology known as Blockchain. This means that virtual currencies are based on a distributed ledger by a network of computers," says George. Although Bitcoin is the most popular virtual currency, it is only one among thousands of coins. The biggest cryptocurrencies according to the tracker, Coin Market Cap, are Bitcoin, Ethereum, Ripple, Binance Coin, Cardano, Polkadot, Bitcoin Cash, and Litecoin.
The rise and rise of Bitcoin
Of all the available virtual coins, Bitcoin has set itself apart due to its price appreciation. Between January and mid-April 2021, Bitcoin's price increased from $40,000 (Sh4.3 million) to $60,800 (Sh6.5 million). According to economic and financial analyst Ephraim Njega, the rally over the past four months has mainly been driven by investor flight to safety and acceptance by institutional investors and governments. "There is a lot of concern on the future of the global economy following the impact of the pandemic. Major economies such as the US have printed massive amounts of money to fund stimulus packages. This has caused inflation fears that are now feeding the demand for Bitcoin which is seen as inflation-proof," says Njenga. He explains that the reason why Bitcoin is perceived to be inflation-proof is because the total number of Bitcoins is capped at 21 million coins.
To invest in the cryptocurrency market, you will need to open an account. This can be done through any reputable local P2P (peer to peer) exchange. Examples of P2P exchanges in Kenya are Paxful, Localbitcoins, and Binance. You will then use this account to buy bitcoin, which you can then use to buy any other cryptocurrency you wish to access. According to George, the reason why you will need to buy bitcoin first is that it is the base currency in cryptocurrency trading. "In normal financial trading system, the US dollar is used as the base currency. In cryptocurrency exchanges, bitcoin is used as the base currency," he says. If you wish to sell your investment, you will still use the local P2P markets, which can also be used to offload investments in other foreign exchanges.
When deciding whether to buy or not, it is important to understand the risks. George says that most people lose their money by entering the crypto market when it is at the peak like it is now. "All investments require a lot of patience and a good knowledge of what you're doing. The majority of investors don't have these. When markets undergo corrections, they prefer to cash out at losses than wait for recovery," he says.
According to Njenga, volatility is the greatest risk in investing in Bitcoin. "The valuation of Bitcoin is based on demand and supply since the currency is not anchored on any real-life asset. Its value can rise to infinity and it can also fall to zero," he said, adding that the trick to getting it right with cryptos is to avoid getting caught on the wrong side of a market correction. According to George, this may not be the best time to buy. "Currently, everything is flying off the shelves, even the bad cryptos," he says. Other than Bitcoin, he singles out Ethereum, Cardano, Stellar Lumens, FTT, BNB, Litentry, Serum, and AAVE as some of the virtual coins to watch out for after-market correction. Safety is the other concern you should know before you buy. "You must know how to secure your coins because the possibility of losing your investment to hackers is real," says Njenga.
Scams, con games and pyramid schemes shoot up whenever an investment is highly attractive. One such scam was what was known as BitClub. According to George, these programs claim that they can offer guaranteed returns over a specific time to those who join in. "You buy an 'investment package', and you are encouraged to refer new people as you earn tokens for successful referrals," he says. Money invested through these programs is lost, George says.
According to George, the biggest red flag is the unrealistic promise in returns within short durations. "Never invest in someone is prodding you to invest so that you don't lose out on crazy weekly or biweekly returns. Even global drug dealers don't make such returns!" says George. Check out if the virtual currency you are investing in can be found on www.coinmarketcap.com . If it is available, check the traded volumes for the last 24 hours. If they are too low, the coin can be easily manipulated. "If the traded volume is something like $10,000, the risk of scammers creating artificial demand is very high," he said. Most cryptocurrency scam investment schemes are not registered as businesses in Kenya. George explains that they are run-off virtual offices in South America, Europe, or Asia. If you lose your money, there is no way you can get it back," says George.
Bitcoin versus securities in Kenya
According to George, the returns in Bitcoin currently outweigh any other mainstream asset class by far.
The equities market is stuck in a six-year downward trend Money markets are currently offering an average of 9 percent returns per year Treasuries are offering returns of 12.6 percent to long term investors
Bitcoin has made a return of 718 percent on capital so far
According to price statistics on Coin Market Cap, here's how five virtual coins other than Bitcoin are currently doing:
Ethereum – $2,200 (Sh237,000) Binance Coin – $527 (Sh56,916) Bitcoin Cash – $930 (Sh100,000) Litecoin – $257 (Sh27,000) Cardano – $1.2 (Sh130)
