In the last couple of years, cryptocurrencies such as bitcoin have not only rocketed in value but also in popularity as more and more mainstream news articles are published about the incredible returns they have offered some early adopting investors. Headlines such as ‘investing $2000 in Bitcoin five years ago would make you a millionaire today’ are of course, extremely tempting for anyone growing their wealth. But with so much uncertainty surrounding Bitcoin and other cryptocurrencies, are they a safe investment for your super? Is Bitcoin something you’d be willing to stake your retirement on?

Today, Squirrel are sharing four things you NEED to know about cryptocurrencies before you plan on investing.

 

1. Cryptocurrencies are volatile

The volatility of cryptocurrencies and hugely dramatic price fluctuations are one of the reasons many shrewd investors choose to stay far away from them. For some, the volatility of cryptocurrencies are exactly why they choose to invest.

The reason Bitcoin and other cryptocurrencies are so volatile is due to a number of factors. These are:

Supply and demand - the more abundant the supply, the lower the price levels and vice versa.

Mining Difficulty - as each Bitcoin transaction goes through a blockchain whereby miners have to solve a mathematical puzzle in order for the transactions to go through.

Practical Use - The perceived utility of a cryptocurrency also affects its price. If a virtual currency has little to no use in ‘real life’ than its value is significantly affected. The ‘contract’ basis of Ethereum for example is deemed to be of practical value which is probably why it’s the world’s second largest cryptocurrency.

Market News - Positive and negative media reporting can dramatically affect the sentiment surrounding cryptocurrencies. The media don’t always get it right, as proven by their 2015 ‘Bitcoin is dead’ reporting which has proved to be completely wrong following the astronomical growth in value over 2016 and 2017, which made many early adopters millionaires pretty much over night.

 

Nuts of wisdom: As with any commodity, cryptocurrencies are driven by the laws of supply and demand. However with a smaller market size as compared to established forms of currency, even small movements of a cryptocurrency can have a pronounced effect on its price.  

2. Cryptocurrencies are decentralised

 

Bitcoin was invented in 2009 following the GFC that almost brought down our entire financial system in 2008. It was introduced by an anonymous programmer under the alias of Satoshi Nakamoto in a white paper, which outlined the need for a ‘trustless payment system that could operate in a decentralised peer-to-peer network.’

The reason Bitcoin’s invention was so remarkable was because it uses advanced cryptography to prevent counterfeiting, giving users both more security and financial privacy.

As a decentralised currency it is not governed by a central bank that can be subject to politics and is instead governed by the laws of maths. Although it’s an undeniably positive thing that with Bitcoin, you can transfer money to anyone in the world without exchange rates devaluing it along the way, as well as the fact that Bitcoin’s value won’t suffer from hyperinflation because of Government decisions.

Being decentralised also means that no single company or person has control over Bitcoin in order to manipulate it and profit from it.

However, without any regulation at all, analysts and financial advisers worry about the legitimacy of Bitcoin and the fact there is no one to police for spoofing, wash trading, and other such dodgy activity.

There’s also the worry of potential future crackdowns by Governments, who could seek to make Bitcoin illegal and therefore limit Bitcoin adoption in those countries. It could also be argued that with the current model of Bitcoin, where decision making is governed by the mining community that are so central to each transaction and vote on different issues surrounding Bitcoin’s future (e.g. the introduction of Bitcoin Cash) could form the basis of a cartel that in essence controls Bitcoin in a similar way to our current financial system. (We welcome a debate on this in the comments below!)

Nuts of wisdom: Although governments could technically ban Bitcoin, this would probably be a futile operation and just send Bitcoin into the black market. Instead, we are more likely to see regulatory frameworks being imposed like the ones we’re seeing introduced now in Australia along with the UK and Switzerland.

 

3. The future of Bitcoin and other Cryptocurrencies is uncertain

 

Even if the notion of digital currencies becomes more mainstream and we see developments in their distribution for use by the general public, this doesn’t necessarily mean that the currency you’ve invested in will survive. Many people argue that Bitcoin has first mover advantages, but at the moment its primary use is as a store of value rather than being used for payments. If other cryptocurrencies, such as Ethereum add more value in these areas, then they could end up being the best performing digital currencies of the future.

There is also a fair amount of speculation surrounding cryptocurrencies and the many ‘bubbles’ that they have been through over the years. It leads many investors to question whether cryptocurrencies are in fact the biggest gamble of them all.

Nuts of wisdom: The only certainty with cryptocurrencies is that their price will remain extremely volatile in the near future.

4. Investing your Super in Cryptocurrencies

 

At present, the ATO are allowing investments in cryptocurrencies through your Squirrel SMSF. In fact, we have many customers that are doing this exact thing, with a variety of strategies.

One thing you need to be aware of is the audit process and making sure you pass the ‘sole purpose’ test. When it comes to the audit, you will need to show your wallet balances and all deposits, trades and withdrawal statements. So if you made 1000 transactions by day-trading, you’d need to show all of these as part of the audit.

If you sell it back to fiat currency, you also need to make sure your funds go back into your SMSF’s bank account and not your own as well as declaring any profits or losses for tax purposes.

At Squirrel, we are advocates for a diversified portfolio and not keeping all your nuts in one basket. Investing your super in cryptocurrencies could be extremely profitable for your retirement, but you also stand a lot to lose if the crypto you choose to invest in suddenly tanks.

 

Nuts of Wisdom: Diversify your portfolio with balanced investment strategies for piece of mind when investing your super in cryptocurrencies.

5. Crypto Exchanges

One of the main differences for SMSF investments in cryptocurrencies to your personal investments is the type of account you have. On exchanges such as Independent Reserve and Coinspot, you can open accounts that are specifically for SMSFs.

From a compliance perspective, both of these exchanges are best for an SMSF. It also helps you when it comes down to the accounting for your SMSF, which requires you to take a screenshot of all your crypto transactions and balance as it is on 20th July at 6pm AEST.

If you have transactions in crypto-crypto exchanges, rather than AUD-crypto exchanges; it massively complicates the accounting for your fund, because of the fluctuation in values  between AUD and each coin.

Speak to one of our SMSF team if you want some clarification on this.

 

Are you ready to start an SMSF and invest in cryptocurrencies? Click here to get a free consultation today.

 

Disclaimer: Squirrel are not financial advisers and this article is not to be interpreted as personal advice to a reader.