Is Putting Your Money in Cryptocurrency a Good Idea?

How we store wealth has evolved over time—from hiding money under mattresses in the era of our forefathers to modern banking, and now, the rise of decentralized finance (DeFi).

Kenya has embraced the move towards crypto trading with notable success. According to CNBC Africa, the country ranked first globally in peer-to-peer cryptocurrency trading volume and fifth in overall crypto activity in 2023. Despite this growth, only 8.3% (4.3 million) of Kenyans have adopted cryptocurrency.

In the past, the government had been cautious, issuing several warnings and a soft ban in 2015 against financial institutions engaging in crypto trading. However, this stance is shifting. In December 2024, the government introduced a draft policy to regulate virtual assets and their service providers. This move comes after the Worldcoin frenzy, where thousands lined up to sign up for the digital currency.

Recognizing the growing interest among investors, the government has now taken steps to regulate the sector. Inspired by how developed nations have embraced digital assets, Kenya is working to establish a regulatory framework. Treasury Cabinet Secretary John Mbadi affirmed the government’s commitment to balancing the opportunities presented by virtual assets (VAs) and virtual asset service providers (VASPs) with effective risk management.

Despite these positive developments, one key question remains: Is cryptocurrency a smart investment? Let’s find out.

Also Read: KRA Goes After Cryptocurrency Transactions in New Tax Strategy

Understanding Cryptocurrency

Simply put, cryptocurrency is a digital currency traded through a decentralized peer-to-peer payment system secured by cryptography. It exists solely as digital entries in online databases that record specific transactions. These currencies are stored in digital wallets that are encrypted for security. Transactions are recorded on a public ledger (blockchain), where regular updates are made by currency holders.

Over the years, thousands of cryptocurrencies have emerged, but some of the most well-known include:

• Bitcoin: Introduced in 2009, Bitcoin was the first cryptocurrency and remains the most commonly traded. In early 2010, one Bitcoin was priced at $0.05 (approximately Ksh6 in today's dollar value). Today, the average price of one Bitcoin is $96,726.43 (about Ksh12.5 million).
• Ethereum: Launched in 2015, Ethereum was introduced at $0.31 (Ksh40 in today's dollar value) as part of a crowdfunding campaign. Today, its price has risen to $2,702.13 (Ksh351,260).
• Litecoin: A popular cryptocurrency with a current price of $128.09 (Ksh16,652).
• Ripple: Another well-known digital currency, priced at $2.73 (Ksh 354).

Is Cryptocurrency a Safe Investment?

Africa’s view on cryptocurrency investment is a blend of optimism and caution. While there is significant interest and growth potential in cryptocurrency within Kenya and across Africa, experts consistently advise a cautious approach due to the volatility and risks involved. Godwin Emefiele, Governor of the Central Bank of Nigeria, compared cryptocurrencies to gambling, urging investors to be cautious given the high market volatility.

Unlike stocks, where prices are tied to the performance of a company, cryptocurrency prices are driven solely by demand. Rob Williams, MD at Schwab Center for Financial Research, emphasized that while the wild price swings in crypto have made some investors wealthy, they’ve also led to substantial losses. He suggests that cryptocurrencies are better suited for speculative investments, where one trades outside their savings and retirement portfolio.

Understanding the fundamentals of an investment is key to assessing its safety. As Warren Buffet famously said, "Risk comes from not knowing what you're doing," highlighting the importance of thorough research. Focusing on the margin of safety helps create a buffer against potential losses.

Also Read: Treasury to Spend Ksh1.8 Billion on Crypto Regulations

Benefits of Cryptocurrencies

Cryptocurrency offers a range of benefits that appeal to both individuals and businesses. Here are some of the key benefits:

• Decentralization and Transparency – All transactions occur directly between parties without intermediaries and are made accessible to everyone. Since cryptocurrencies operate on decentralized networks, they are not controlled by any single entity. This reduces the risk of government interference, censorship, and systemic failures that traditional banks face.
• Lower Fees and Faster Transactions – Cryptocurrencies provide a cost-effective and quick way to send money across borders, eliminating the delays and high fees associated with traditional banking systems.
• Financial Inclusion – Cryptocurrencies offer financial access to the unbanked population, allowing individuals to participate in the global economy.
• Inflation Protection – Some cryptocurrencies, like Bitcoin, have a capped supply (21 million coins), preventing excessive inflation. Unlike traditional currencies, which lose value due to inflationary pressures, capped cryptocurrencies may retain their value over time.

Risks Associated with Cryptocurrencies

While cryptocurrencies offer numerous benefits, they also come with significant risks:

• Market Volatility – Cryptocurrencies are known for extreme price swings, often influenced by media coverage and market speculation. This volatility can lead to substantial losses for investors.
• Liquidity Challenges – Some trading platforms may lack sufficient assets to fulfill orders. Additionally, the demand for cryptocurrencies is not guaranteed, which can limit liquidity.
• Tax Implications – Cryptocurrency transactions may be subject to taxation, but regulations vary across jurisdictions, making compliance complex. Cryptocurrencies are subject to a 3% tax on all transactions in Kenya.  
• Technical Complexity – Buying, selling, and storing cryptocurrencies require specific knowledge, software, and sometimes specialized hardware, which can be challenging for beginners.
• Fraud and Cybersecurity Risks – The crypto space attracts cybercriminals, putting investors at a high risk of scams, phishing attacks, and hacking.
• Lack of Regulation – The crypto market remains largely unregulated, leading to potential market manipulation. While financial authorities enforce anti-money laundering (AML) and counter-terrorism financing (CTF) measures, cryptocurrency exchanges operate with minimal oversight. This lack of tangible backing makes them a risky investment.

Also Read: Six Investment and Risk-Taking Lessons to Learn from The Crypto Crisis

Wrapping Up

As Kenya and other African nations move toward regulating the crypto space, investors are encouraged to conduct thorough research and approach cryptocurrency with a clear understanding of the risks involved. Like any investment, diversification and informed decision-making are key to minimising potential losses.

Ultimately, whether cryptocurrency is a good investment depends on an individual's risk tolerance, financial goals, and knowledge of the market. For those willing to navigate its complexities, crypto can be a high-risk, high-reward asset.