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Series: Crypto Explained - Part Two: What are the risks of crypto?

We’re going to consider the risk to reward ratio, payment process and the rise of decentralised finance.

Simon Crotty Simon Crotty 4 minute read

In part one we explained what Crypto is, and now we’re going to consider the risk to reward ratio, payment process and the rise of decentralised finance.

First off, perhaps the most obvious concern is environmental, for our thoughts on this, check out John Berry’s column in Stuff about the energy issues faced by the blockchain networks. 

Bitcoin faces environmental problem - by John Berry 

When venturing into crypto, as with any emerging technology, it’s important to be aware there will be growing pains and risks. 

For anyone interacting directly with these networks, tread with caution. There is no handholding. You are responsible for keeping your passwords safe. There isn’t anyone to call up to recover your password – we’ve heard countless horror stories of people losing access to their wallets. The lack of current regulation means for better or worse, there’s no one preventing you from interacting with any product or service available on these networks. You have free reign. If you do your own research there are returns to be made, but on the flip side, skipping this step can get you burnt.  

Of course, this may not be for everyone. Some of us take comfort in handing over responsibility to an intermediary. For this reason, there are plenty of companies building on top of these networks. They aim to create a safe and seamless user experience to the point you won’t even realise you’re interacting with cryptocurrencies. After all, successful technology is an invisible one.

How do I get paid (or pay) with Crypto?

We are only scratching the surface when it comes to potential use cases. For your average person, an obvious benefit of crypto is instant cross-border payments at a fraction of the cost of traditional payment channels. If you’ve ever sent money overseas using your bank, you would have noticed two things:

  1. The payment takes way longer than it should.
  2. The amount of money received on the other end is noticeably less than the amount you sent.

Why is that? For one, most banks use a payment network called SWIFT (Society for Worldwide Interbank Financial Telecommunication), which was first released in 1977. If you think most of us replace our mobile phones every 2-3 years, then why are we still using payment technology over 40 years old? 

Simply because a lack of substitutes meant they could!

Cryptocurrencies are putting an end to that. It’s forcing larger institutions to improve and adapt, which ultimately benefits the end-users. 

The Rise of Decentralised Finance...

With cryptocurrencies came Decentralised Finance (DeFi), a whole new economy making financial products accessible to everyone and anyone in a decentralised manner. Financial services such as insurance, loans, exchanges, and savings accounts all fall under the term DeFi. It sure sounds great but what does that mean to me? 

First, it drastically reduces barriers of entry for the world's unbanked population. That’s over 1.7 billion people who previously couldn’t access the most basic products such as a secure savings account. Something most of us take for granted.  

Second, the products available through DeFi are superior to many of those offered by traditional finance (TradFi) institutions. Take term deposits as an example. You choose to lock up your savings for 6 months to earn an interest rate of 1.0% annually. 

In DeFi, and specifically, with a dApp called Anchor, I can deposit my stablecoin (a stable cryptocurrency pegged to the US Dollar) and earn up to 20.0% annually. Oh, and did I mention you can withdraw that money any time without incurring any break fees? No, it’s not a fraud, and yes, I use it myself. As with anything, it’s important to understand the risks involved, but I can only suggest you do your own research (DYOR). 

If you’re interested in learning more about Anchor Protocol, I can suggest watching this video: Learn more about Anchor Protocol

-Simon Crotty​ is an investment analyst at ethical fund manager and KiwiSaver provider Pathfinder Asset Management, which is part of Alvarium Wealth.

Disclaimer: Pathfinder does not recommend anyone buy or sell crypto, this is merely information to help people better understand it.

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