A Beginner's Guide To Investing In Bitcoin (Nz)

Bitcoin is a decentralised digital cryptocurrency based on blockchain technology. It was created to show how electronic transactions can be simple and secure outside of traditional global banking institutions. Each Bitcoin is a digital code held on a central blockchain ledger. If you hold the key to that code, you “own” that Bitcoin.

If you’re interested in investing in Bitcoin, there are a few ways to buy it in New Zealand. Here are some of the main ones:

- Buy Bitcoins from a Bitcoin exchange

- Receive Bitcoins for goods and services

- Mine your own Bitcoins

There are some risks involved in buying and selling Bitcoin. For example, speculation is rife and its value can fluctuate wildly. It’s also important to note that there are tax implications when buying and selling Bitcoin in New Zealand.

Bitcoin wallets

There are two main types of crypto wallets: hot wallets and cold wallets. Hot wallets are connected to the internet and are often free to use, offering add-on services such as trading or staking in exchange for fees. Cold wallets, on the other hand, are disconnected from the internet and require the purchase of a hardware device to store your crypto. Cold wallets tend to be more secure but may be harder to access and more difficult to recover if the device is lost.

When choosing a Bitcoin wallet, it is important to consider factors such as security, ease of use, and compatibility with other wallets and exchanges. Some popular Bitcoin wallet options include:

• Ledger: A well-known cold wallet with a mobile app, desktop app, and browser extension. It offers two-factor authentication and educational resources for users.
• Trezor: A high-end cold wallet with a touch screen interface. It offers staking, crypto purchases, and integrations with other crypto firms.
• Crypto.com DeFi Wallet: A hot wallet created by a company known for its crypto exchanges. It is tailored for decentralized finance (DeFi) and integrates with the Ledger hardware wallet.
• Zengo: A next-generation hot wallet that uses multi-party computation (MPC) to secure assets and perform transactions. It claims to be the first consumer wallet to use MPC.
• Coinbase Wallet: A separate product from the Coinbase exchange, allowing users to store cryptocurrency themselves. It integrates easily with the Coinbase exchange and offers mobile and browser-based connections to decentralized applications.
• MetaMask: A free and open-source hot wallet that can store any digital asset built on Ethereum. It integrates with many "Web3" applications and offers staking and DeFi apps through its MetaMask Portfolio feature.

Bitcoin exchanges

There are hundreds of Bitcoin exchanges on the internet, based all over the world. However, while Bitcoin exchanges and the trade in Bitcoins are not regulated, the Kiwi dollars you must spend to purchase Bitcoin are.

• Kiwi-Coin is a New Zealand-based Bitcoin exchange founded by local Bitcoin enthusiasts. It has been in operation for 10 years and is the longest-serving exchange in the country.
• Independent Reserve is one of the most trusted exchanges in Australia and New Zealand. It caters to retail users, traders, SMSFs, and institutions. You can buy Bitcoin using EFT, Osko/PayID, POLi, and SWIFT.
• Swyftx is a platform targeted at New Zealand users that aims to simplify crypto buying for beginners.
• EasyCrypto is a great site to buy Bitcoin and other cryptocurrencies for those in New Zealand, Australia, South Africa, Brazil, and Nigeria.
• Paybis is a popular cryptocurrency exchange that serves 180 countries and 48 US states. It is registered with FinCEN, making it a more trusted and regulated exchange.
• Coinbase ONLY allows crypto-to-crypto conversions for New Zealand residents as of September 2020.

It is important to note that there are no Bitcoin ATMs in New Zealand as of September 2020.

Tax implications

The Inland Revenue Department (IRD) categorises people who buy and sell crypto into three groups:

• People buying crypto with the intention to sell it
• Those buying crypto for a profit-making scheme
• People buying crypto to use as a currency to buy goods and services

Unless you fall into the third category, you must pay tax on any profits you make from selling crypto. If you do intend to use crypto to buy goods and services, you must keep clear and compelling evidence to support your claim.

Cryptoassets are treated as a form of property for tax purposes. They are not subject to GST when bought or sold, but they do have GST implications when received as payment for normal business activities.

When investing in a Bitcoin ETF, it's important to know what you are investing in and the jurisdiction of that investment. This is because the tax implications can vary depending on the legal details of the investment. For example, if you are purchasing shares in a US company, it will be taxed differently than if you are buying units in a New Zealand-listed fund.

In New Zealand, if the cost base of your Foreign Investment Funds (FIFs) is more than $50,000, you will need to pay tax under the FIF rules. There are two main methods for calculating your FIF tax liability: the Fair Dividend Rate (FDR) method and the Comparative Value (CV) method.

The FDR method assumes a 5% dividend on your FIFs, regardless of the actual dividends received. To calculate the FDR income, multiply the market value of your FIFs on April 1 by 5%.

The CV method calculates your actual investment growth. To do this, you must subtract the sum of the opening market value of your FIFs on April 1 plus the cost of any new units bought during the year from the sum of the closing market value of your FIFs on March 31 plus any dividends and sale proceeds received during the year. If the result is positive, that is your FIF taxable income for the year. If it is negative, you made a loss and do not owe FIF tax.

It is recommended that you consult a qualified financial advisor or a chartered accountant who specialises in cryptocurrency taxation to help you navigate the complexities of cryptocurrency taxation and ensure you are meeting your tax obligations.

Bitcoin mining

• Wallet: This is where any Bitcoin you earn as a result of your mining efforts will be stored. A wallet is an encrypted online account that allows you to store, transfer and accept Bitcoin or other cryptocurrencies. Companies such as Coinbase, Trezor and Exodus all offer wallet options for cryptocurrency.
• Mining software: There are a number of different providers of mining software, many of which are free to download and can run on Windows and Mac computers. Once the software is connected to the necessary hardware, you’ll be able to mine Bitcoin.
• Computer equipment: The most cost-prohibitive aspect of Bitcoin mining involves the hardware. You’ll need a powerful computer that uses an enormous amount of electricity in order to successfully mine Bitcoin. It’s not uncommon for the hardware costs to run around $10,000 or more. The computer hardware required is known as application-specific integrated circuits, or ASICs.

It's important to note that Bitcoin mining has generated controversy because it is not considered environmentally friendly. The massive amount of electricity consumed by Bitcoin mining has drawn criticism from environmental groups and limits the profitability of miners.

Bitcoin safety

Bitcoin is a risky investment. Its value can be extremely volatile, and it's prone to wild speculation and hype. If you decide to buy Bitcoin, it's a good idea to invest only what you can afford to lose and take measures to protect your assets. Here are some key things to keep in mind:

Volatility

The value of Bitcoin can fluctuate wildly. For example, in 2021, it almost doubled in price, from around US$32,000 to over US$61,000, before losing all those gains by the end of the year. In 2022, it rocketed to an all-time high of US$68,789 in November, then slumped to US$17,708 in June.

Unlike traditional financial exchanges, crypto markets don't have circuit breakers, which automatically pause trading when prices dive or rise too quickly. So, when investing in Bitcoin, understand that the value can drop quickly and may take years to recover.

Exchange Failures

Crypto exchanges can and do fail. For example, major exchanges FTX and FTX.US filed for bankruptcy in 2022, and it could take years for users to receive a payout.

Cold Storage

If you want to avoid losing your assets on an exchange, transfer them to a separate crypto wallet, preferably a cold wallet. A cold wallet is an offline storage device, like a USB stick, that isn't susceptible to online theft. Cold wallets range in cost from $100 to $200.

However, cold wallets aren't without risk. You'll need to keep your password and seed phrase safe and secure, and you'll also need to protect the physical device.

Scams and Theft

When Bitcoin gains in value, so do the number of scams targeting investors. Be wary of phishing attacks, fake websites, and emails that appear to be from a crypto exchange but are actually attempts to get your passwords.

Additionally, Bitcoin's blockchain can't be hacked, but bitcoins can be stolen through other methods. These include phishing attacks, fake websites, man-in-the-middle attacks, and malware.

Frequently asked questions