Wed 05 Sep, 2018
The Benefits and Risks of Investing in Cryptocurrency
Although Bitcoin has been around since 2009, investing in cryptocurrency didn’t really start capturing the mainstream media’s attention until 2013. The public interest grew again in late 2017 due to the astronomical increase in its value during these periods.
This resulted in an increase in the general public’s interest in investing in cryptocurrency. Following this parabolic advance in 2017, more mom-and-pop investors poured in, so as to not miss a slice of the action.
Then, due to uncertainty in the market the price of cryptos came crashing down. Values fell by 50-80% across a huge range of coins, and with it signified the end of a monumental bull run and start of a bear market.
With such huge risks at stake, why are so many people still starting an SMSF to invest in cryptocurrencies?
In this blog, we examine the benefits and risks of investing in cryptocurrency with an SMSF:
The Benefits of Investing in Cryptocurrency
High Return Potential
Early adopters during the last bull run made unprecedented returns on their original investment into Bitcoin and other cryptocurrencies - also known as alt-coins or ‘alts’.
In fact, many crypto investors made 6 figure returns during this time and some are even well in the green after the crash.
As cryptocurrencies are so volatile, the potential for huge returns is possible in very short spaces of time. This is great news for your SMSF, if you buy and sell at the right time. Remember you only pay 10% CGT on SMSF income before retirement and 0% after, so these returns can remain in your pocket rather than the tax man with an SMSF.
Impossible to Counterfeit
Unlike fiat currency (traditional money), cryptocurrencies are impossible to counterfeit or commit fraudulent transactions.
It’s the reason blockchain technology is so revolutionary and is being adopted by Governments and organisations around the world.
No Loss of Wealth Through Inflation
Unlike cash, which depreciates in value over time, Bitcoin and most other cryptos are deflationary. That means there are a fixed number that will ever be in existence, so in time they should technically increase in value due to their scarcity.
Take the country of Venezuela as an example. The million percentage inflation that has occurred in the country has left many people in the depths of poverty. For these people, cryptocurrencies are extremely valuable because they are not affected by Government policies and corruption.
The Risks of Investing in Cryptocurrency
As well as soaring through the roof, your cryptos can equally tumble through the floor because of its volatile nature. It’s not unusual for cryptos to go through periods of losing up to 80% of their value in a matter of hours.
That’s why it’s important to think carefully if you’re investing all of your super into cryptocurrencies. The potential for loss is extremely high with cryptos and it’s your retirement money at stake.
Risks of Hacking
As a digital asset, your bitcoin and other cryptocurrencies are at a high risk of hacking. We highly recommend to all our SMSF clients to keep their cryptos on a hardware wallet to minimise this risk. If you’re connected to the internet or reveal your private key to someone - you could be hacked and have your account drained.
If you lose all your cryptocurrencies in a hack, you may not be covered by insurance for your SMSF.
The high volatile nature of cryptocurrencies and the fact that these assets are very much in their infancy as products/currency/collectible assets mean that they can be highly unpredictable.
SMSFs should have a diversified portfolio with a goal to increase returns for retirement. As a result, the unpredictability of cryptos could be risky for the certainty of achieving those goals.
Limited Use at Present
Because of all of the above, there is limited use for cryptocurrencies and mass adoption at present. The good news is that Governments and businesses are adopting blockchain around the world. However it’s impossible to say which cryptos will stand the test of time and have a positive use case in the future.
If the cryptos you invest in continue to have a limited use case, then surely their value will depreciate rapidly in time.
Interested in learning more about investing in cryptocurrency with your super? Contact one of our experts today!