Cryptocurrency: A Risky Proposition for South African Stokvels

In South Africa, a traditional form of group saving known as stokvels is undergoing a significant evolution. Originally established for common purposes such as funding funerals or bulk grocery buying, stokvels are increasingly being driven into the volatile world of cryptocurrency, posing substantial financial risks to participants.

Stokvels operate by pooling money from members on a regular basis, with each member taking turns to receive the lump sum. A system rooted deeply in trust and community, it's no surprise that these savings groups hold an estimated value of R50 billion. However, the trend of funneling these community funds into crypto investments could be problematic.

Recently, South African banks like Standard Bank, FNB, and ABSA reported a notable rise in stokvel activities, each observing approximately 15% growth in deposits over the last five years. Despite the traditional appeal of stokvels, an African Response study indicates a shift in preference towards cryptocurrencies and informally held cash savings.

The crypto allure is largely driven by the massive gains seen during Bitcoin's episodic booms. Unfortunately, the erratic nature of cryptocurrency markets means that these gains are often accompanied by severe losses. Over the last few years, the implosion of major cryptocurrency platforms such as FTX, BlockFi, and Celsius has highlighted the dangers of crypto investments - dangers that novice stokvel investors might not fully comprehend.

Diving into the specifics, the lack of understanding about the cryptographic keys – terms summarized by the popular saying "Not your keys, not your coins" – is often a pitfall for many new investors. During the cryptocurrency boom from 2019 to 2022, investors lost billions as they poured funds into platforms acting more like banks than secure wallets, resulting in significant financial casualties following bankruptcies and mismanagement.

Of particular note to the South African market was the collapse of Ice3x in April 2021, a once-popular local crypto exchange. This event left many investors out of pocket, highlighting the risks inherent in cryptocurrency dealings, particularly for those accustomed to the communal and relatively stable nature of stokvel savings.

Financial institutions are now advising stokvel groups to redirect their focus towards more traditional and secure investment avenues. For example, FNB has launched digital stokvel accounts with no monthly fees, which have saved members over R131 million in withdrawal fees since 2020. Similarly, Standard Bank is bridging the gap between traditional saving and modern convenience by integrating savings directly to retailer credits, such as those offered by Makro. This move not only offers a secure saving option but also facilitates safer purchasing processes for bulk goods.

The unfolding scenario offers a stark reminder that while digital finance solutions like cryptocurrencies can offer significant returns, they come with heightened risks that might not suit traditional saving structures like stokvels. The wisdom from seasoned investors like Warren Buffet, suggesting sticking to investments one understands, seems particularly pertinent here. As the landscape of communal savings in South Africa continues its digital transition, it’s crucial that stokvels tread cautiously, considering both the potential gains and the possibly irrevocable losses.