Super Crypto: A Good Investment Option?

Investing in cryptocurrencies is a risky business. The field is prone to security breaches and scams, and the market is extremely volatile. However, the potential for huge gains is also there, and the industry is maturing, with increased crypto adoption by companies.

Cryptocurrencies are powered by blockchain technology, which maintains a record of transactions and keeps track of who owns what. The first real-world purchase with Bitcoin was made in 2010, when a man from Jacksonville, Florida, bought two pizzas for 10,000 bitcoin. If he had kept that bitcoin, it would now be worth close to half a billion dollars.

Bitcoin is the most widely used cryptocurrency, followed by Ethereum. Both have had meteoric rises and dramatic falls in value. In 2021, Bitcoin's price rose to $60,000 before collapsing to around $17,000 in 2022. It has since hit record highs in 2024.

The question of whether to invest in crypto is a complex one. On the one hand, it is a risky, volatile asset class. On the other hand, it has been a great investment by historical standards, and the potential for huge gains is always there.

Crypto as a short-term investment

This approach can be riskier than long-term crypto investing due to the need for precise timing and the potential for losses if predictions go awry. Short-term crypto trading requires a keen understanding of market dynamics and quick decision-making skills, making it a more fast-paced and speculative form of crypto investment.

• Day Trading: Day trading is a fast-paced strategy where traders buy and sell cryptocurrencies within the same trading day. The goal is to capitalise on intraday price fluctuations. Day traders rely on technical analysis, chart patterns, and real-time data to make quick and informed decisions. Success in day trading requires discipline, a solid trading plan, and the ability to react swiftly to market changes.
• Scalping: Scalpers are like micro-traders, aiming to profit from minor price movements. They make numerous small trades throughout the day, aiming to accumulate profits over time. Scalping requires precision and often involves margin trading to maximise returns. Traders should be prepared to monitor the markets closely and execute trades swiftly.
• Swing Trading: Swing traders take a slightly longer-term approach, seeking to profit from short- to medium-term price swings. They analyse price charts and identify trends, entering positions when they expect an asset to move in their favour. Swing trading typically involves holding positions for several days to weeks, allowing traders to capture more significant price movements.
• Arbitrage: Arbitrage traders capitalise on price disparities between different cryptocurrency exchanges. They buy an asset at a lower price on one exchange and sell it at a higher price on another, profiting from the price difference. While this strategy may seem risk-free, it requires quick execution and access to multiple exchanges to be effective.
• News-Based Trading: Crypto markets are highly influenced by news and events. Traders who follow developments in the crypto space closely engage in news-based trading. They anticipate how significant news announcements, regulatory changes, or market events can impact cryptocurrency prices. News-based traders make short-term trades based on their predictions.

While short-term crypto trading can be profitable, it comes with challenges. The allure of quick gains is undeniable, but the volatile nature of the crypto market means higher risks. Success in short-term strategies depends on accurate cryptocurrency predictions, precise timing, and risk management.

Crypto as a long-term investment

Cryptocurrency is a risky investment option due to its volatility and the potential for high losses from security breaches. However, it can also offer high returns, and its growing adoption by companies indicates a maturing industry and potentially safer investments. Here are some key considerations regarding crypto as a long-term investment:

• Diversification and Risk Mitigation: Investing in cryptocurrencies is risky, especially due to the potential for significant losses from security breaches. Diversification through cryptocurrency ETFs can help mitigate these risks. It is important to do your research and understand the specific cryptocurrency and its underlying technology before investing.
• Industry Adoption: The increasing adoption of cryptocurrencies by companies such as Block and PayPal suggests a maturing industry. This indicates that cryptocurrencies may become safer investments over time.
• Volatility and Returns: Cryptocurrencies like Bitcoin and Ethereum have experienced significant price volatility, with dramatic rises and falls in value. While this volatility can lead to high returns, it also poses a significant risk for investors.
• Regulatory Landscape: The regulatory landscape for cryptocurrencies is still evolving, and it is important to stay informed about any changes that may impact your investments.
• Tax Implications: The tax treatment of cryptocurrencies varies by country. In some countries, cryptocurrencies are taxed as property, with capital gains taxes applicable upon the sale of crypto assets. It is essential to understand the tax implications in your jurisdiction before investing.
• Long-Term Potential: Cryptocurrencies with strong underlying technology and use cases may have long-term potential. For example, Bitcoin is seen as a store of value, and Ethereum has the potential to disrupt the financial services industry. However, it is important to remember that not all cryptocurrencies will succeed, and many projects may fail or become obsolete.
• Investment Horizon: Investing in cryptocurrencies typically requires a long-term horizon. Short-term price fluctuations can be significant, but holding crypto assets for the long term may provide a better chance of realizing gains.
• Portfolio Allocation: Given the risky nature of cryptocurrencies, it is generally recommended that they comprise a small portion of your overall investment portfolio. Diversifying your crypto investments across multiple assets can also help manage risk.
• Storage and Security: Storing and securing cryptocurrencies can be more complex than traditional investments. It is essential to choose secure wallets and consider offline storage options to protect your assets from potential security breaches.
• Due Diligence: Conducting thorough due diligence is crucial before investing in any cryptocurrency. This includes researching the team behind the project, understanding the white paper, assessing the competitiveness of the project, and analyzing the market demand and adoption potential.

In summary, crypto can be a viable long-term investment option, but it requires careful consideration and risk management. It is essential to approach crypto investments with a long-term perspective, conduct thorough research, and only invest what you can afford to lose.

Crypto's high risk and volatility

Cryptos High Risk and Volatility

Cryptocurrencies are highly volatile and risky assets. They are subject to wild fluctuations in value, often driven by speculation, investor sentiment, and media hype. For example, Bitcoin's value dropped by 30% in a single day. Such volatility can be attributed to various factors, including supply and demand, investor actions, and media influence.

One of the key risks of investing in cryptocurrencies is the potential for high losses due to security breaches. Cryptocurrency exchanges are vulnerable to hacking and other criminal activities, which have resulted in significant financial losses for investors. Additionally, the lack of centralised control means that if you lose access to your private key, you will lose access to your cryptocurrency with no means of recovery.

The decentralised nature of cryptocurrencies also presents regulatory challenges. The Australian Taxation Office (ATO), for instance, does not recognise cryptocurrencies as 'currency' or 'foreign currency' because no country has adopted them as legal tender. This means that buying and selling cryptocurrencies triggers a capital gains tax event, and any losses cannot be claimed as a tax deduction.

The speculative nature of crypto investments further contributes to their volatility. Crypto assets, unlike traditional investments, do not generate income, and their value is based purely on market speculation. This makes the investment's value sensitive to slight changes in investor expectations, perceptions, and fears of missing out.

The influence of media personalities and industry moguls, such as Elon Musk, further underscores the volatile nature of cryptocurrencies. A single person's opinion or action can significantly impact the value of these assets, which can be unnerving for investors.

In summary, cryptocurrencies are highly volatile and risky investments. The potential for significant gains coexists with the possibility of substantial losses. Before investing, it is crucial to understand the risks and volatility associated with cryptocurrencies and ensure that you are prepared for the inherent unpredictability of this emerging asset class.

Crypto's legal and tax status

The legality of cryptocurrencies varies across the world. Cryptocurrencies are not considered legal tender in many countries, including the United States, Canada, Singapore, South Korea, China, India, the United Kingdom, and some Latin American countries. However, the regulations and attitudes towards cryptocurrencies are constantly evolving, and some countries have taken a more progressive approach to their legal status.

In the United States, the regulatory landscape for cryptocurrencies is complex and varies by state. While cryptocurrencies are not considered legal tender, cryptocurrency exchanges are legal and fall under the Bank Secrecy Act (BSA). The Internal Revenue Service (IRS) has issued tax guidance, considering cryptocurrency as "a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value."

Other countries, such as Canada, Australia, and Japan, have implemented comprehensive regulations for cryptocurrencies and exchanges. Cryptocurrency exchanges are legal in these countries, with specific registration and compliance requirements.

Some countries, like Switzerland, have adopted a remarkably progressive stance towards cryptocurrency regulations. Cryptocurrencies are legal and subject to taxes, and exchanges are regulated by the Swiss Financial Market Supervisory Authority (FINMA).

On the other hand, some countries have imposed strict restrictions or even banned cryptocurrencies. For example, China banned financial institutions from handling Bitcoin transactions in 2013 and outlawed domestic cryptocurrency exchanges in 2017. Bolivia has also comprehensively banned cryptocurrencies and exchanges.

When it comes to taxation, the treatment of cryptocurrencies varies across countries. In some countries, like Germany, cryptocurrencies are considered private funds or financial instruments and are exempt from value-added tax (VAT) on exchanges with fiat currencies. In other countries, such as the United Kingdom, gains or losses on cryptocurrencies may be subject to capital gains tax.

In summary, the legal and tax status of cryptocurrencies is complex and varies globally. While some countries have embraced the technology and implemented comprehensive regulations, others have imposed strict restrictions or bans. As the use of cryptocurrencies continues to grow, the regulatory landscape is likely to evolve further.

Setting up a crypto SMSF

Trust Deed

Firstly, your SMSF must have a trust deed that permits the use of crypto assets as an investment. The trust deed should clearly state the sole purpose of the SMSF, which is to provide retirement benefits to its members. It should also specify who the trustees and members of the SMSF are, as well as their rights and obligations. Most importantly, the trust deed must allow for investments in cryptocurrency.

Register your SMSF

You will need to set up and register your SMSF with the Australian Taxation Office (ATO) and, if using a corporate trustee, with the Australian Securities and Investments Commission (ASIC). All fund members must sign the required documents, including the Trust Deed, which must be physically signed by hand. You will then need to apply for an Australian Business Number (ABN) and elect for your fund to be an ATO-regulated SMSF within 60 days. You will also need to appoint an approved SMSF auditor, who must be independent and registered with ASIC.

Investment Strategy

Your SMSF must have an investment strategy that outlines the types of investments planned and how they will be managed. This strategy must include crypto as an asset and be consistent with the SMSF's investment objectives and risk profile. It is important to justify why crypto is a suitable investment for each member, considering their investing preferences and risk profiles. The investment strategy must be reviewed and updated at least once per year.

SMSF Bank Account

A bank account in the SMSF's name is necessary to manage the fund's operations and accept contributions and income. Choose a reputable bank that allows for the correct establishment of bank accounts for SMSF entities. Ensure that the SMSF has a separate bank account to keep its money distinct from the members' accounts.

Rollover Superannuation

Once your SMSF bank account is set up, you can initiate a rollover from your industry or retail super fund to your SMSF. You can do this by completing a "Request for rollover of the whole balance of super benefits between funds" form. Most industry and retail funds will also have equivalent forms to simplify the process.

Choose a Crypto Exchange

Select an Australian-based crypto exchange or broker that has a specific account type for SMSFs and provides accurate and comprehensive transaction reporting. Ensure the exchange can support SMSF entities to avoid breaching the sole purpose test. When registering, you will need to provide personal ID documents and a copy of your signed and executed SMSF trust deed.

Crypto Wallet

Depending on your SMSF's security preferences, you may choose to store crypto on the digital currency exchange or an external hardware wallet. If using an external wallet, ensure the purchase is invoiced to the SMSF and keep a copy of the tax invoice for the SMSF audit. Do not store SMSF assets and personal assets in the same wallet.

Costs and Compliance

There are several costs to consider when setting up an SMSF, including financial advice, SMSF corporate trustee fees, annual compliance costs, and the ATO supervisory levy. It is recommended to consult with an accounting professional to ensure you are meeting all compliance responsibilities and staying up to date with any changes to the law. Remember that SMSFs are highly regulated and must pass an annual audit, so excellent record-keeping is crucial.

Frequently asked questions