A Beginner's Guide To Crypto Investing In Pakistan

Investing in cryptocurrencies in Pakistan requires careful consideration of the risks involved due to the lack of clear regulations. While there are no laws explicitly prohibiting the use of cryptocurrencies, the State Bank of Pakistan (SBP) and the Securities and Exchange Commission of Pakistan (SECP) have issued warnings about the risks associated with investing in digital currencies. Despite this, many Pakistani traders are still active in the market, and there have been no legal actions taken against individuals or businesses dealing with cryptocurrencies.

When it comes to investing in cryptocurrencies in Pakistan, there are a few trusted exchanges available, including Binance, Kraken, and OKX. These exchanges offer multiple deposit methods, a variety of cryptocurrencies, and different security features. It is important to do your research and choose an exchange that suits your needs and goals. Additionally, you should also consider the underlying technology, market capitalization, trading volume, and payment methods supported by the exchange.

Investing in cryptocurrencies carries significant risks due to its highly volatile nature. It is crucial to have a good understanding of the technology and be prepared to take on risks. The values of cryptocurrencies can fluctuate rapidly, and there is no protection for investors in the case of fraud or hacking. Therefore, it is essential to only invest what you can afford to lose and to stay informed about the latest trends and developments in the crypto world.

Choosing a cryptocurrency exchange

Reputation and Security:

Look for an exchange with a solid reputation in the crypto community, offering robust security features such as two-factor authentication, SSL encryption, and cold storage. Binance, for instance, provides 2-factor authentication and offers multi-signature wallets and cold storage options.

Charges and Fees:

Consider the trading, depositing, and withdrawal costs associated with the exchange. Aim for an exchange with reasonable and competitive fees. Kraken, for example, has fees as low as 0.16% per transaction, with spreads of around $0.10 per Bitcoin.

Payment Methods:

Select an exchange that supports your preferred payment methods, such as bank transfers, credit/debit cards, and online payment systems. Most exchanges accommodate various payment options.

Customer Support:

Opt for an exchange that provides excellent customer support, including a comprehensive knowledge base, FAQs, and live chat or phone support. Kraken, for instance, offers 24/7 customer support via phone, email, and live chat.

Supported Coins:

Choose an exchange that supports a wide variety of coins, including major cryptocurrencies like Bitcoin, Ethereum, and Dogecoin. Platforms that regularly add new coins tend to be more customer-centric.

User Interface:

Consider your level of experience. If you're a beginner, select an exchange with an intuitive and user-friendly interface. More seasoned investors may prefer exchanges with advanced features like advanced order types and transaction exports for tax purposes.

Regulation:

Prioritize well-regulated exchanges, as they offer greater protection for your funds. Additionally, look for exchanges that provide depositor's insurance, safeguarding your assets even if the platform faces liquidity issues.

Deposit and Withdrawal Options:

The ideal exchange should offer multiple payment methods to facilitate seamless fund transfers. The more options available, the better.

Safety and Security:

Prioritize exchanges that enforce multiple layers of security, such as two-factor authentication and cold storage. Additional security measures like daily off-site backups, third-party security audits, and email confirmations for transactions further enhance the security of your account.

Customer Support:

Look for exchanges that take pride in their customer support. Consider the availability of various support channels, response times, the quality of responses, and user feedback on the support they received.

Bonuses and Incentives:

Some exchanges offer signup bonuses or referral programs that can provide additional benefits. For example, KuCoin offers a $10 sign-up bonus, while LocalCryptos provides a 20% rebate on trading fees for new users.

In conclusion, when choosing a cryptocurrency exchange in Pakistan, conduct thorough research, compare fees and features, and prioritize security and customer support. Remember that your choice of exchange will significantly impact the profitability and ease of your trades.

Understanding the risks

Investing in cryptocurrencies is a high-risk activity. It is important to understand the risks before investing. Here are some of the critical risks to consider:

Price Volatility and Manipulation

Cryptocurrency prices are extremely volatile and subject to sharp and sudden moves. This volatility is driven by market sentiment, speculation, and manipulation. The unregulated and anonymous nature of digital asset markets makes them susceptible to sentiment, emotion, and publicity, which can cause wild swings in prices. Crypto exchanges, media owners, and influential investors can manipulate prices, and this manipulation appears to be widespread, although not yet widely proven. The most common manipulation strategies include wash trading, dark pool trading, pump and dumps, and shilling. The lack of regulatory frameworks adds to the uncertainty, as investors are unsure about the future restrictions and tax treatments.

Security and Custody

Storing cryptocurrencies is risky due to the constant threat of hacking. There have been significant incidents of theft on personal wallets and exchanges. If cryptocurrencies are not correctly stored and protected, they can be accessed and stolen by hackers. Additionally, investors cannot recover lost or stolen assets, and mistaken transactions cannot be reversed. Cryptocurrencies also lack official safeguards or insurance, so rebates on lost investments are dependent on the organization's discretion.

Loss of Private Key

Bitcoins and other cryptocurrencies are stored in a digital wallet and can only be accessed by the holder of both the public and private keys. If the private key is lost, destroyed, or compromised, the investor may lose access to their digital wallet and their cryptocurrencies. If a third party acquires the private key, they can gain unauthorized access to the investor's assets.

Cyber-Security Risks

Trading platforms and third-party service providers are vulnerable to hacking and other malicious activities. There have been instances where large amounts of bitcoins were stolen from exchanges due to security breaches. Additionally, malicious actors can gain control of sufficient consensus nodes on the blockchain network, leading to potential alterations. The creation of "mining pools" and other concentration techniques increases the risk of centralized control over decentralized networks.

Regulatory and Country Risks

There are inconsistencies among regulators regarding the legal status of cryptocurrencies. Some countries may restrict the right to acquire, own, hold, sell, or use digital currencies. Additionally, regulators are concerned about the potential use of cryptocurrencies by criminals and terrorist organizations. Investing in cryptocurrencies in countries with unclear regulations, like Pakistan, carries a higher risk of financial loss due to the lack of protection for investors.

Payment methods

When it comes to payment methods for investing in cryptocurrency in Pakistan, there are several options available. These include:

• Bank transfers: This is a convenient method offered by crypto exchanges and P2P platforms. Transfers are usually cheaper but may take some time to complete. Bank transfers are a good option for investors looking to purchase large amounts of cryptocurrency and those who prefer higher transaction limits. Examples of platforms that support bank transfers include Binance and LocalBitcoins.
• Credit/debit cards: Cardholders can use their credit cards for instant purchases, while debit cardholders must have sufficient funds in their bank accounts. This method is generally associated with higher fees. Examples of platforms that support credit/debit cards include CEX.io and Paybis.
• PayPal: Although less common, some vendors on P2P platforms may accept PayPal. However, they typically charge higher prices and fees.
• EasyPaisa: This is a popular mobile wallet and branchless banking system in Pakistan. It is widely accepted on P2P platforms such as Binance P2P and LocalBitcoins. EasyPaisa is known for its speed, ease of use, and widespread adoption in the country.
• JazzCash: Another branchless banking service and mobile payment option in Pakistan. It is also commonly found on P2P marketplaces like Binance P2P and Paxful. JazzCash is user-friendly, fast, and widely adopted.
• Wire transfers: Some vendors on crypto exchanges and P2P platforms may accept wire transfers. Binance P2P is one example of a platform that supports this payment method.
• Prepaid cards: These can be used to purchase cryptocurrencies, but users must first register with a crypto exchange that supports such payments.

It is important to note that the availability and suitability of these payment methods may vary depending on the chosen platform and the user's preferences. Each method has its own advantages and disadvantages in terms of fees, transaction speed, and convenience.

Setting up a wallet

Setting up a crypto wallet is the first step to entering the world of cryptocurrencies. There are several types of crypto wallets available, each with its own unique features and security protocols. The three most popular ones are hosted wallets, non-custodial wallets, and hardware wallets. Here is how you can set up each type of wallet:

Hosted Wallets

Hosted wallets are similar to bank accounts, where a third party, such as Coinbase, keeps your crypto for you. The main benefit of a hosted wallet is that if you forget your password, you won't lose your crypto. However, a drawback is that you may not have access to all the features that other crypto wallets offer.

To set up a hosted wallet, follow these steps:

• Choose a reliable and secure platform that is easy to use, complies with government regulations, and offers two-step authentication.
• Create your account by entering your personal information and choosing a secure password.
• Buy or transfer crypto. You can buy crypto using a bank account or credit card, or transfer existing crypto to your new hosted wallet.

Non-Custodial Wallets

Non-custodial wallets, also known as self-custody wallets, give you full control of your crypto. You are responsible for remembering and safeguarding your password, which is often referred to as a "private key" or "seed phrase". If you lose your private key, there is no way to access your crypto.

To set up a non-custodial wallet:

• Download a wallet app, such as Coinbase Wallet.
• Create your account. You don't need to share any personal information, not even an email address.
• Write down your private key, which is usually presented as a random 12-word phrase, and keep it in a secure location.
• Transfer crypto to your wallet. You may not be able to buy crypto using traditional currencies, so you will need to transfer crypto from elsewhere.

Hardware Wallets

Hardware wallets are physical devices, such as Ledger or Trezor, that store your private keys offline. They offer increased security, even if your computer is hacked, but they are more complex and costly.

To set up a hardware wallet:

• Buy the hardware from a reputable manufacturer.
• Install the software. Download the software from the official company website and follow the instructions to set up your wallet.
• Transfer your cryptocurrency to your wallet. You will need to link your hardware wallet to a brokerage account or exchange to transfer your crypto.

Each type of wallet has its own advantages and disadvantages, so it's important to choose the one that best suits your needs and security preferences. Remember to always do your research and follow security best practices to protect your crypto assets.

The legal status of cryptocurrency in Pakistan

The legality of cryptocurrency in Pakistan is a complex and evolving issue. Cryptocurrency is a digital asset that uses cryptography to secure transactions and verify the transfer of assets. It offers advantages such as anonymity, accessibility, and liquidity, but its legal status in Pakistan remains unclear, with a mix of signals from authorities.

In 2018, the State Bank of Pakistan (SBP) and the Federal Board of Revenue banned digital currencies, citing concerns about the risks associated with investing in them. The SBP's notice warned against the potential for financial losses, cyber-security risks, and money laundering. However, there has been no official law passed by the Parliament of Pakistan banning cryptocurrency trading or mining.

In 2020, a petition was filed against the SBP's notification about the restriction on the use of cryptocurrency. The petitioner, Pakistani television personality and entrepreneur Waqar Zaka, argued that the SBP does not have the authority to ban cryptocurrency as it is not mentioned in Pakistani laws. The conclusion, as of 2022, is that cryptocurrency is neither legal nor illegal in Pakistan.

The Securities and Exchange Commission of Pakistan (SECP) has taken a "let-things-happen" approach, advocating for embracing the financial benefits of digital assets and innovation without overregulating. The Central Bank has also eased its stance, clarifying that Pakistan has not banned cryptocurrency. However, the SBP maintains that the potential risks of cryptocurrency, such as lack of visibility on transactions and the potential for misuse, outweigh the benefits.

The future of cryptocurrency in Pakistan remains uncertain, and it is recommended that an Islamic committee, well-versed in both Islamic finance principles and cryptocurrency technology, thoroughly investigates and assesses the compatibility of cryptocurrency with Islamic principles, taking into account the diverse perspectives and opinions surrounding its use in the country.

Frequently asked questions