From bitcoin and Binance to ETFs: how to dip a toe in the swirling cryptocurrency market
It’s not for everyone and it’s certainly not ‘safe’ but many investors are speculating successfully in crypto. Here’s what you must know first.
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If – and only if – you wanted to get started as an investor in crypto, how might you begin?
On the one hand we read of instant millionaires making unprecedented fortunes from the new world of digital assets. On the other hand we see crypto disasters: this week another crypto exchange collapsed – myCryptoWallet, a Melbourne-based exchange, shut its doors leaving at least 20,000 clients wondering whether they have lost all their money.
Across the investment industry we are witnessing a mad scramble to position for what could be the biggest change in finance in our lifetime. Sceptics are everywhere, yet at the same time big money is moving fast. Commonwealth Bank wants some of the action, launching crypto services, while even the Reserve Bank is examining its own digital currency.
Until now most crypto investment activity has been neatly split into two channels. At one end of the spectrum is the direct channel populated by an army of geeks and day traders speculating on crypto coins. At the other end are experienced investors often accessing the scene through indirect channels such as specialist funds and listed ventures.
Just take a look at some of the names behind the recent Nasdaq float of Iris Energy, a “green” crypto mining technology company that included legendary Australian investors including Thorney’s Alex Waislitz, Platinum’s Kerr Neilson and Geoff Wilson of Wilson Asset Management.
Let’s look at both these avenues, which are now open to any investor.
Direct channels
There are thousands of crypto coins and big fortunes are often made on new coins that join the system, especially when they appear for the first time on the major crypto exchanges. However, in reality bitcoin comes first and the rest run well behind. If bitcoin has a sudden fall or sudden spike, it will be reflected across the entire sector.
This weekend bitcoin is trading at about $US48,500, little changed from the levels it reached after a severe bout of selling a week ago, when a string of top coins dropped by nearly 20 per cent. If that sort of sell-off rattles you, this entire area may not suit your portfolio. Crypto coins are highly volatile – if you had bought bitcoin in November (at $US67,000) you would be facing losses. Then again, if you had bought it this time last year at $US20,000, your would have doubled your money with plenty to spare.
Keep in mind that bitcoin is pretty stable compared to some of its lesser known rivals. Bitcoin represents up to half the total market capitalisation of crypto, which in turn is pretty close to the total value of all Australian superannuation assets. When you get to more exotic crypto coins the capacity of these products to change price is nothing short of stomach-churning. In a 24-hour period this week, the ALL BEST ICO coin jumped by 1134 per cent, while SafeDodgecoin fell 80 per cent.
For new investors, the hardest question to answer is how to assess risk. All crypto coins are risky, but how might you judge the level of risk in each one? This is a new, uncharted asset class.
Nonetheless, some useful measures have already appeared, such as the Gemini interest rate tables. (If you recall, Commonwealth Bank recently announced a partnership with New York-based Gemini to offer its crypto services.)
Gemini offers its own customers “crypto interest accounts”, where clients can lend their crypto into the market – the rate they get reflects the risk of the coin.
On this basis, the rates offer us a rare ability to get a snapshot of relative risk: the higher the interest rate on a coin, the higher the risk.
On current rate settings, Axie Infinity, which is a popular gaming coin (at 4.04 per cent) is seen to be twice as risky as bitcoin (at 1.49 per cent). Similarly, Filecoin (at 7.25 per cent) is four times as risky as bitcoin. Among other popular coins, ratings also stay low – ethereum is 1.76 per cent, Decentraland is 1.25 per cent.
The second challenge for the direct investor having chosen a coin is to choose an exchange that will trade that coin. Although the regulators – led by Josh Frydenberg – are moving as fast as they can to keep up with crypto, there is always a sense that they are not keeping up at anything like the required pace.
Which is one reason Australian investors often like to keep their crypto on Australian exchanges. Among the leading Australian exchanges are Swyftx, CoinSpot, Independent Reserve and BTC Markets. Among the major international exchanges popular with Australians are Coinbase, Binance and Kraken.
In choosing a crypto platform, the key issues are security – ideally the fund has two-factor authentication and is among the better known brands.
In terms of fees, joining these exchanges is free. You simply link to your bank account.
As competition grows in the space, fees are falling all the time. Traditional agencies such as Canstar or new operators such as bestcryptoexchangeaustralia.com.au will offer services that compare transaction fees. Among the leading platforms, transaction fees are generally between 0.5 per cent and 1 per cent.
One of the lowest fees in the market is offered at 0.1 per cent from Binance, the biggest platform in the world. In a field that has been dismissed as a fad by senior bureaucrats, Binance – which has a daily turnover of $US76bn ($106bn) – is battling regulatory stress in many jurisdictions. In September, it moved ahead of regulators, dropping crypto futures services in Australia, while most recently it is facing allegations in the US of money laundering.
Indirect channels
If putting your money into crypto directly is not for you, but you are attracted to the notion of spreading bets through specialist funds, the local market is responding rapidly. Beyond the specialist wholesale funds, we now have a race inside managed funds – especially exchange-traded funds – to service the everyday investor.
But don’t expect that a fund or ETF is somehow insulated from the volatility of the crypto market. If it’s in crypto, it will rise and fall with crypto’s wider fortunes.
The first crypto-related ETF to hit the market was the BetaShares Crypto Innovators fund, which is based on a US index that tracks crypto-related technology offerings. This fund had a spectacular debut on the ASX last month when it broke records for fund inflows. However, earlier this week when bitcoin had one of its regular swoons, the BetaShares Crypo ETF went down with it. At one stage the fund was 20 per cent below its debut price.
As investors digest the brutal reality of crypto investing, one thing is clear – when it’s good it’s really good and when it drops, there are no safe corners, and that includes any product claiming to be a smart “picks and shovels” play on the wider scene.
Bouts of volatility will regularly rattle this sector, but stand by for a lot more products. There are a string of new funds expected from investment industry, including a fund from ETF Securities, which is led by Graham Tuckwell, the doyen of the Australian ETF sector who floated the first gold ETF two decades ago. We can also expect more banks to offer crypto services following the lead of Commonwealth Bank
One last thing: if you are taking the first step into crypto, once you have picked your coin, your crypto exchange or your specialist fund, keep in mind capital gains tax is already applied on all transactions.
Who said there’s no certainty in crypto? You can be certain you will pay tax on it!
Originally published as From bitcoin and Binance to ETFs: how to dip a toe in the swirling cryptocurrency market
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