Author Alan Maddick 01/11/2021
This article is just my opinion, please consider your personal situation and consider getting professional advice before you act. “Crypto” Cryptocurrency, Bitcoins, Ether, to some it is all they think of, for others all new. One thing is for sure, there are a lot of people buying and selling small amounts of crypto. More and more we are helping clients lodge tax returns that include crypto investments, even seeing clients invest in crypto with their super funds. Because of this I thought I would write an article about my opinion and hopefully fill in a few pieces of the puzzle for you.
Crypto is not an investment.
Wait what? I know that may people are big advocates of crypto as the next investment, “its the new way of doing business” “Crypto will take over from the banks” etc. Even if you do believe this then Crypto is not an investment in the traditional sense of the word; personally I do not think that crypto will take over from primary national currencies like the Australian dollar (AUD) or US Dollar (USD) but perhaps it will find it’s home as an easy and safe medium for online purchases, only time will tell it’s exact place in the world of finance.
If you believe that crypto will take over from traditional currencies like the AUD and USD then you still have to recognise that a coin like BTC is then the same as AUD or USD or any other currency. Currencies have no underlying value other than as a medium of financial exchange, traditional currencies values like the Aussie dollar are controlled partly by supply and demand and partly by the deliberate influence of central banks and governments. Crypto is not controlled by any central bank so it’s value is dictated by simple supply and demand, it is important to remember this as on the one hand many Crypto coins have a limited number of coins available and/or it gets harder and harder to mine or create coins over time but on the other hand if no one wants and uses the coin then the price will plummet.
Historically people who “invest” in currencies like AUD and USD are generally what is commonly called traders, buying and selling currencies based on world economic news and other technical research. often they will hold their investment for a few hours or a few days.
This type of activity (trading) is not investing. Investing activity would be buying something hoping it will go up and holding it for a while. Preferably years, trading because of the regular activity is more like a job or business and as tax agents we recognise trading activity in the same way as any other business. My advice to anyone who wants to trade financial products (whether shares, Fx, futures or crypto) is it is a serious job and those who are good at it do it full time as their job. If you are going to do it you need to invest the same amount of time and care or what you are doing is just gambling.
In the Crypto world if you believe that a given coin is going to increase in value over the long term then the way to invest in it is buy it and keep it. For a long time. If you have $1000, $5000, $2000 invested in you keep jumping in and out of various coins because of what your mate told you or some social media post this is not investing; certainly not any sensible technique of investing!
Personally I consider investing in crypto high risk, the reason is even if crypto is going to be a big part of our society you cannot predict which currency or currencies will be valuable in the future. BTC is expensive now but if everyone uses Ether instead and BTC is no longer bought then BTC will become valueless for example.
The Government has also written a cautionary article about Crypto investments HERE
If you want help with your Crypto or advice on tax consequences of your trades please contact our tax experts here
Alan Maddick is and Authorised representative of Vivid Financial Planning Pty Ltd Australian Financial Services License 478937
This content has been prepared without taking account of your personal objectives, financial situation or needs. Before you make any decision regarding any information, strategies or products mentioned in this newsletter, consider whether it is appropriate to your own objectives, financial situation and needs. Where quoted, past performance is not indicative of future performance.