Mon 20 Aug, 2018

How to Invest in Cryptocurrencies with an SMSF

More and more Australians are choosing to invest in cryptocurrencies with an SMSF. Despite their high risk, cryptos can provide potentially high reward investments, which is why they’ve been growing in popularity both among our clients and in Australia.

However, given how highly volatile and controversial they are, knowing how to properly invest in cryptocurrencies with an SMSF is important. In this blog post, discuss the different types of cryptocurrencies you can invest in, where to purchase them, and how to keep your cryptos compliant with the ATO.


Types of Cryptocurrencies

Bitcoin is often wrongly used as the name to refer to all cryptocurrencies as a whole. But Bitcoin is just one of the major cryptocurrencies on the market. All others are collectively referred to as altcoins.

There’s also Ethereum, Dash, Litecoin, Monero, Ripple, EOS and Cardano, as well as hundreds of others that utilise the blockchain to solve real-world problems.

With an SMSF, your investment strategy is up to you, so you can invest in the cryptocurrencies you choose.


How to Purchase Cryptocurrencies

How to Invest in Cryptocurrencies with an SMSF | Squirrel Super

To buy, or invest in a cryptocurrency or technology, you have to use an exchange. There are two types of these:

Fiat exchange

Fiat currency refers to any Government-backed currency – like Australian Dollars. So, a fiat exchange is one that involves fiat currency being exchanged for cryptocurrency.

We suggest using Coinspot or Independent Reserve as both these exchanges cater specifically SMSFs.

Crypto-crypto exchange

These exchanges refer to trades where a cryptocurrency is exchanged for another cryptocurrency. Binance is a popular example of a crypto only exchange and the company itself has been heralded as the fastest ever startup to achieve profitable tech unicorn status.

At Squirrel, we actually don’t allow clients to trade on crypto-crypto exchanges for their SMSF. It becomes far too complex for accounting and audits as there are far too many fluctuations in all the values of each coin.

So when you invest in cryptocurrencies with an SMSF, you need to use a FIAT exchange and AUD to buy them with.


Cryptocurrency Investment Strategies for SMSFs

With an SMSF, you have to make sure your investment strategy passes the sole purpose test - that you only benefit from the investments in retirement. This means that when you buy cryptos you do them entirely under your fund and never under your own account. It’s the golden rule of investing in cryptocurrencies with an SMSF!

At Squirrel, we are not financial advisors, so we don’t advise on your personal investment strategy. However, we do suggest that for an SMSF, a buy and hold, or HODL approach is better for audit - rather than actively trading.

While a few of our clients do some trading, day trading isn’t a good idea for an SMSF. This is because multiple transactions can over-complicate the accounting and audit process for you.


The Risks of Investing in Cryptocurrencies With an SMSF

How to Invest in Cryptocurrencies with an SMSF | Squirrel Super


Well first of all, they’re pretty volatile. It’s become commonplace for values to drop by 50% or more as they did in January 2018.

There are a few reasons cryptos are so volatile, including supply and demand, mining difficulty, whether they have a perceived practical use and also market news. Positive or negative media reporting can also dramatically affect the sentiment and therefore price of cryptos, which makes fundamental analysis an important consideration.

Another risk is that the future of bitcoin and cryptocurrencies are uncertain. Although blockchain technology is revolutionary in itself, as we see developments in how it works and connects the world, original cryptos may not keep their first mover advantage.

Just look at the Dot com era. Remember how AOL and Blackberry used to be dominating forces? Now Facebook and Google are reigning - but they weren’t around at the very beginning of the internet.


Keeping Your Cryptocurrencies Compliant

Compliance is key when it comes to your SMSF. Luckily, we’ve got a lot of experience here at Squirrel with the accounting side of things.

Key considerations for the auditing of funds involved with cryptocurrency:

  • The most important is to make sure that all accounts, ledgers and transactions have been operated under the SMSF’s title and not an individual’s. You cannot buy or transfer any cryptos under your own name,
  • You also need to take a screenshot of your portfolio as it is on 20th June at 6pm AEST - this needs to include details of all the coins and transactions you’ve done that financial year.

Funds with cryptocurrencies can make auditing more complex, so we’ve got a full guide on cryptocurrencies and what you’ll need for audits.

Interested in learning more about cryptocurrency as an SMSF investment class? Discover the risks cryptocurrencies can face if they’re not stored propertly and what steps you should take to securely store your cryptocurrency investments and protect your retirement fund.