You may have heard about crypto in the news, on social media or from a friend. But what are crypto assets and how do they work? Before you invest in anything, including crypto assets, it’s important to understand how the investment works and potential risks.
On this page you’ll find
What is a crypto asset?
A crypto asset is an umbrella term for digital assets that use cryptography (the writing or solving of codes), peer-to-peer networks, and distributed ledger technology (such as blockchain) to create, verify and secure transactions. They are transferred, stored and traded electronically.
Crypto asset prices can be very volatile. This means they can increase or decrease in value by large or small amounts, throughout the day and night. You risk losing some or all of your money. Check your risk tolerance before committing to any investment. Learn more about the risks of investing in crypto.
Crypto assets can have multiple features and uses. They cannot be easily divided into mutually exclusive classes/categories. Crypto assets can include:
- value-referenced crypto assets
- non-fungible tokens (NFTs)
- utility tokens
- governance tokens
Importantly, any type of crypto asset may be considered a security depending on its features and the circumstances surrounding its issuance and trading.
Value-referenced crypto assets is designed to maintain a stable value over time by referencing the value of another asset or assets, such as a fiat currency, commodity, or another crypto asset. You may have heard the term “stablecoin”. The term can be misleading since “stable” does not adequately reflect how volatile these crypto assets can be. There have been many instances where the value of so-called “stablecoins” was extremely volatile and where their value was significantly reduced. As the term “stablecoin” may be misleading, the OSC generally refers to these types of assets as value-referenced crypto assets (VRCAs).
The most common VRCAs reference the value of a fiat currency and, in particular, the US dollar. However, VRCAs are subject to various risks and are not the same as fiat currency (e.g., Canadian or US dollars). Find out more about the unsteady truth about stable coins.
Non-fungible tokens (NFTs) record ownership of a unique tangible or intangible object — such as a song, digital image or video. “Non-fungible” means each token is unique and cannot be exchanged for another.
Utility tokens use a distributed ledger or blockchain platform to provide access rights or the ability to purchase a specific product or service. The provider of the product or service typically issues the tokens, which can only be used within the issuer’s network.
Governance tokens can grant voting and management power to holders of such tokens on a specific blockchain network. This can include the ability to vote on proposals raised by the blockchain community on changes to be added to the specific blockchain protocol.
There has been a significant rise in crypto-related scams. Find out more about the red flags of crypto fraud.
Why do people buy or invest in crypto assets?
There are various reasons why investors may decide to buy or invest in crypto assets. According to a 2023 OSC survey, people hold crypto assets as a speculative investment/gamble, as a long-term investment given their belief in crypto assets and the technology, to diversify their portfolio or as an alternative asset class, or to use it to digitally transfer money. Or investors may be drawn by the potential for high returns and hoping to capitalize on price volatility. Others responded that they may invest due to a fear of missing out (FOMO) when they hear others talking about the gains they made in crypto or given a belief it may be a hedge against inflation.
Some crypto assets may also serve a functional purpose, such as tokens that grant access to blockchain-based video games, or value-referenced crypto assets that are used to make purchases of other crypto assets or pay for services. However, currently, most crypto assets are not routinely used for purchasing or trading goods or services. Unlike traditional currencies such as the Canadian or U.S. dollar, crypto assets are not issued or backed by a government or a central bank.
The relative anonymity of crypto transactions, particularly on unregulated platforms, has also made these assets attractive to money launderers and illicit actors. These motivations, coupled with significant risks — such as total loss, fraud, and inadvertently enabling illicit activity — underscore the need for careful consideration before investing.
Where can you buy or sell crypto assets?
There are different ways to buy and sell crypto assets. You could trade directly on the blockchain or through another party such as a registered crypto asset trading platform. You could also invest in an investment fund that holds crypto assets through an investment dealer.
- Blockchain – The digital ledger system behind most crypto assets. It tracks and validates transactions through a decentralized network. Unlike a centralized system like a bank account, blockchain is distributed and maintained at multiple points through a network of computers.
A blockchain tracks the movement of a crypto asset from address to address. Think of it as a digital accounting journal that is replicated across multiple computers rather than stored in a single place. Blockchain transactions are viewable by the public using a blockchain explorer service. It shows all the details of transactions on a blockchain network. - Crypto asset trading platform – An online trading service that allows investors to buy and sell crypto assets. It’s sometimes referred to as crypto exchange. When you buy crypto assets on a registered platform, the platform can hold your interest in the crypto assets in a crypto wallet and with a third-party custodian. Learn more about crypto asset trading platforms.
- Investment fund – There are regulated investment funds that have investment objectives to hold crypto assets. They can be purchased by retail investors in the same manner as investment funds holding more typical assets such as equities.
What is a public key and private key?
Every address on a blockchain has a public key and private key, which are comprised of a string of letters and numbers. Public and private key pairs allow you to send and receive crypto assets directly on the blockchain:
- Public key – Used to receive crypto assets from other people and identify your account on the blockchain. Like your email address, your public key can be shared.
- Private key – Used to access your account and send crypto assets to other people. The private key must be kept secret in a secure place. Similar to your email password, a private key is not meant to be shared. If it gets lost or stolen, you can’t regain access to the crypto assets in your digital wallet. Anyone who knows the private key associated with your crypto assets can access and trade them on the blockchain.
Digital wallets are technologies that hold the keys associated with your crypto assets on the blockchain. Your digital wallet comes with an assigned public key and a private key. Digital wallets can be hot or cold. A hot wallet connects to the internet. A cold wallet stays offline.
Depending on how you bought the crypto assets, you may choose to withdraw your crypto assets and keep them on your private wallet directly. Otherwise, the crypto trading platform generally holds the crypto assets on your behalf in a crypto wallet that is controlled by the platform, as well as through a third-party service known as a custodian.
If the crypto trading platform as well as a third-party custodian hold clients’ crypto assets, you’ll need to rely on the crypto asset trading platform, or any custodian it works with, to keep the crypto assets safe.
A contractual agreement with a crypto trading platform can include terms that specify who has ownership of the crypto assets and who has possession of them. It’s important to review the client relationship disclosure documentation (or other agreements) to see the legal terms and conditions of your contractual relationship with any platform.
There are several crypto asset trading platforms that have taken steps to be registered in Canada. These platforms are subject to regulatory requirements that helps protect investors. If you are considering investing in crypto assets, always work with a registered crypto asset trading platform. And ask yourself how much reliance you can place on a client relationship disclosure document or agreement with a platform that is not registered and may be in another country. Importantly, all crypto assets carry risk, even if they are available on a registered crypto trading platform. Also, always check the registration of any person or company trying to sell you an investment or give you investing advice.
Try the Crypto Quiz to test your crypto knowledge.
Summary
Crypto assets are digital assets that use cryptography, a digital ledger system, and a peer-to-peer network to create, verify and secure transactions.
- The term “stablecoin” can be misleading since “stable” does not reflect how volatile these crypto assets can be. The OSC generally refers to these assets as a value-referenced crypto asset (VRCA).
- A VRCA is designed to maintain a stable value over time by referencing the value of another asset or assets, such as a fiat currency, commodity, or another crypto asset. VRCAs are subject to various risks and are not the same as fiat currency (e.g., Canadian dollars).
- A crypto asset trading platform is an online trading service that allows investors to buy and sell crypto assets. When looking to buy or sell crypto assets, always work with a registered crypto asset trading platform.
- You can also get exposure to crypto assets through a regulated investment fund that holds crypto assets and is purchased through a registered investment dealer, rather than buying and selling crypto assets.
- A blockchain tracks the movement of a crypto asset from address to address.
- Every address on a blockchain has a private key and public key. Public and private key pairs allow you to send and receive crypto assets. The private key must be kept secret in a secure place.
- Crypto asset prices can be very volatile. You risk losing some or all of your money.
- Crypto assets are frequently used as vehicles of a scam. You should be extra cautious before purchasing from or transferring crypto to someone you only met online, and who is not registered.
