Digital currencies: Getting to know Bitcoin and other crypto

More investors – including self funded retirees – are holding Bitcoin and its digital peers as an asset. Here’s what you need to know.

Recent moves by the likes of Tesla to purchase $US1.5bn ($1.9bn) of Bitcoin helps add to its mainstream acceptance. Picture: AFP

It has been a long time since we have seen an investment that has been so polarising as digital currencies.

Whether or not Bitcoin and other alternative coins replace traditionally government-issued paper currency, known as fiat money, is yet to be seen.

However, recent moves by the likes of Tesla to purchase $US1.5bn ($1.9bn) of Bitcoin helps add to its mainstream acceptance. Indeed, if estimates that perhaps 5 per cent of self-managed super fund investors have Bitcoin holdings are correct then it clearly is time to figure out your approach to the issue.

When you buy or sell shares in Australian listed companies, you use a stockbroker to place the trade on the Australian Stock Exchange and either send or receive cash.

Cryptocurrencies operate in a similar way, but when you buy or sell coins such as Bitcoin or Ethereum you do so using a specialist online exchange. In Australia, one of the largest exchanges is BTC Market, which opened in 2013 when the price of one Bitcoin was $110 (it is now around $60,000).

Caroline Bowler, CEO of BTC Markets, says: “We now have just under 300,000 clients on our platform and have seen a wide variety of users join. SMSF account openings grew fivefold in 2020 and people aged over 60 now represent 9 per cent of our client base whereas in 2017 they were 5 per cent.”

IT professional Steve Marryatt first invested in 2017 after seeing the future opportunity as an investment and a game changer with the potential to reinvent our financial system.

He describes the Bitcoin journey as a rollercoaster of emotions with several highs and lows. “Initially in 2017, I thought I was the world’s best trader trading coins I had no idea about, earning thousands of dollars, with no knowledge of what I was doing, with little thought, technical analysis or know-how. Until, one day out of the blue, the market plummeted, and I lost 70 per cent of all my crypto assets, basically overnight.

“From there I learnt what most investors experience along the journey, to develop a proper risk management strategy and do detailed research on projects rather than selecting speculative coins hoping to make money instantaneously.

“You have to be patient, build a portfolio strategy and ultimately manage risk through the volatility.”

Over the past few years there has been strong resistance to cryptocurrencies by the majority in the financial sector but recently there has been a clear changing of the guard with institutional investors such as pension funds and Wall Street starting to see a “hedging” opportunity with an overheated sharemarket acting as another catalyst.

Major investors such as Grayscale, Square, PayPal and most recently Tesla are driving investor and market adoption above $US1 trillion.

For the average investor, increased accessibility, security and ease of trading has made it simpler than ever before to get started in Bitcoin and other digital currencies.

What’s more, several local exchange-traded fund providers have also flagged intentions to add cryptocurrency ETF baskets to their product range over the next 12 months.

Some cryptocurrency exchanges such as crypto.com even provide you with a debit card so that you can convert your Bitcoin to dollars and spend freely as you would from your traditional bank account.

But where there is opportunity, there is tax. The ATO has provided guidance on the taxation of cryptocurrencies so investors will need to be aware of how to deal with gains and losses.

Caxton Pang, managing director at accounting and business advisory firm Linton, says: “Cryptocurrency assets are considered CGT (capital gains tax) assets from a tax perspective and consequently it requires investors to maintain profit and loss ledger.

“However, there is a personal CGT exemption that can apply to cryptocurrencies if they are kept or used mainly to purchase items for personal use or consumption. Where cryptocurrencies are acquired and used within a short period of time, to acquire items for personal use or consumption, they are more likely to be a personal use asset and capital gains up to $10,000 can be disregarded for CGT purposes.”

For SMSF trustees looking to move into Bitcoin, Pang advises to do the following: “You need to ensure your SMSF trust deed allows investment into cryptocurrencies which are considered a high-risk investment. Your SMSF investment strategy also needs to consider cryptocurrency in the context of risk, liquidity, diversification and retirement needs of the members.”

There are three clear camps when it comes to Bitcoin investment. There are the deniers, the speculators and the believers.

In terms of performance as a financial asset, I liken Bitcoin to a microcap stock where volatility rules and massive gains and losses are expected as the norm. The typical returns experienced during one month of cryptocurrency investment can be compared to five years of investing in blue-chip stocks.

James Gerrard is principal and director of Sydney financial planning firm financialadvisercom.au