Should Australians Invest In Crypto?

As with any investment, cryptocurrencies have their own unique risks and rewards. While some investors have reaped huge profits from these volatile assets, others have fallen victim to the market cycle and have lost their entire investment.

Assistant professor of finance at Texas A&M University-Kingsville, William Procasky CFA,  says that new investors should stay away from crypto. But he also notes that more experienced investors, who understand how to cope with risk, could find a place for it in their portfolios.

“If you’re building a broad-based portfolio and want to add crypto to the 5% or 10% of your portfolio you’re setting aside for alternative assets, then you might be OK,” Procasky says.

Bitcoin and Ethereum are the two largest cryptocurrencies by market capitalisation, and are more established than many other crypto options. This makes them a safer bet for most investors.

“If you go for options like bitcoin and Ethereum, which are more mainstream, there’s a bit more safety around them,” says Lauren Niestradt, CFP/CFA, senior portfolio manager at Truepoint Wealth Counsel.

Related: I Bought My First Bitcoin in a McDonald’s

When it comes to cryptocurrencies, the Australian Securities and Investments Commission (ASIC) offers a series of directives and insights that investors should take into account before deciding to invest.

ASIC points out that the regulatory landscape for cryptocurrencies is far from robust. As many cryptocurrencies and digital assets are not commonly viewed as financial products, the platforms on which they are bought and sold may not fall under ASIC’s regulatory jurisdiction. This could mean investors are left unprotected should a platform fail or become compromised.

Adding to this uncertainty is the volatile nature of cryptocurrency values. According to ASIC, the valuation of these digital assets is largely driven by public sentiment and can fluctuate wildly over short periods. Factors such as media hype, the number of users, ease of trade, the perceived value of the currency, and the viability of the underlying blockchain technology all play into the perceived value of a cryptocurrency.

However, the regulatory body cautions investors about the security risks tied to cryptocurrencies. While their decentralised nature provides a level of anonymity, it also creates a security gap. Without a central databank, once a cryptocurrency is stolen, it’s nearly impossible to retrieve. ASIC suggests that investors may find additional security in offline storage options, known as hardware wallets or “cold storage”. The federal government has expressed its desire to regulate the sector, but progress has been slow.

The technical complexity of cryptocurrencies adds another layer of risk. These assets can be difficult to understand for many, and clear, comprehensive disclosure statements are often lacking. The lack of standardised information and the necessary specific software and understanding of transaction fees can lead to costly errors, such as sending transactions to incorrect addresses or paying excessive transaction fees.

Finally, ASIC raises the alarm about the proliferation of crypto scams. The lack of regulatory oversight and the difficulty in tracing transactions make the cryptocurrency world a fertile ground for fraudulent activities.

Overall, while ASIC does not prohibit investing in cryptocurrencies, it strongly advises investors to be aware of the high-risk factors associated with such investments. The volatility and complexity of this digital asset class, along with the potential for scams and lack of government regulation, should be carefully weighed before investing.

Related: The Future of Crypto Regulation in Australia

Several risks are associated with investing in cryptocurrency: volatility, government regulations and investment scams.

• Volatility. As crypto is such a small asset class relative to other traditional investment markets, smaller amounts of money can have a significant impact on a crypto-asset’s price. This means large investors or entities with lots of capital entering or exiting the market can have a significant impact on price.For those unaccustomed to this extreme volatility, it is easy to be “shaken-out” of the market. This often happens at the worst time, when the market has gone down significantly and the investor decides to sell at a loss. As is human nature, this is often done at the worst possible moment, and many investors will have a story of selling at a loss, only to see their old investment shoot to the moon the very next week.
• Government regulations. According to Michael Collins, CFA, professor of financial planning at Endicott College, many governments have yet to fully regulate the use and trade of cryptocurrencies, making it difficult to know what to expect regarding legal and financial risks. The regulatory crackdown by the SEC in the US shows the use of “regulation by enforcement” coming down on the digital asset industry. As with any new technology that threatens older, more established systems, there is always initial regulatory pushback before the new system is accepted. The question remains; how big will the regulatory battle be for crypto, now that Trump has been elected? In Australia, the federal government has vowed to regulate crypto, and has released a token mapping paper as part of this process, but so far no laws have been introduced.
• Investment Scams. As with any investment industry, fraud and scams run rampant in crypto markets. Hacks are quite common with crypto, too. According to Chainalysis, over  $24.2 billion in cryptocurrency was stolen from between July 2023 and June 2024. Many Australians have fallen victim to crypto scams, too, but with the right security measures and due diligence, it is easily possible to protect your assets from the prying eyes of fraudsters.

According to the 2024 Global Crypto Adoption Index by Chainalysis, the world of cryptocurrencies has seen considerable ups and downs in adoption, but on the whole, has been trending upwards.

“Between the fourth quarter of 2023 and the first quarter of 2024, the total value of global crypto activity increased substantially, reaching higher levels than those of 2021 during the crypto bull market,” the report noted.

Four years ago, countries with emerging economies lead the charge in crypto adoption. These include Vietnam, Philippines, Ukraine, India, Pakistan, Nigeria, Brazil, Thailand, Russia, China, and others. People in these regions often use crypto for practical needs, like sending money overseas, preserving their savings during times of economic instability, and more.

The Global Crypto Adoption Index 2024 authors noted that last year growth in crypto adoption was driven by lower to middle-income countries.”This year, however, crypto activity increased across countries of all income brackets, with a pullback in high income countries since the beginning of 2024,” the report adds.

The launch of the first spot Bitcoin ETF in early 2024 in the US “triggered an increase in total value of bitcoin activity across all regions, with particularly strong year-over-year growth in institutional-sized transfers and in regions with higher-income countries, such as North America and Western Europe”.

DeFi activity “increased significantly” in Sub-Saharan Africa, Latin America, and Eastern Europe between June 2023 and June 2024, compared with the same period the year before.

India has topped the crypto adoption index in 2023 to 2024, followed by Nigeria and Indonesia, with the United States climbing to fourth place. Vietnam, which has previously taken out the top spot, fell came in fifth.

Australia currently sits at rank 39 in global crypto adoption.

With all the speculation surrounding crypto, many backers have touted the prospect of it becoming a global currency. Re-elected US president Donald Trump has certainly expressed his enthusiasm for crypto, claiming that he intends to make the US “the bitcoin superpower of the world”.

Two years ago, US Treasury Secretary Janet Yellen said that she expects a slow decline in the dominance of USD as a share of global currency reserves. While it is unlikely that any other currency will overtake the greenback anytime soon, cryptocurrencies, like bitcoin, are well positioned to increase their share.

“I don’t think governments will allow a competing currency like that on that scale,” says Procasky. “A global currency has to be very liquid and very deep, and there’s nothing that can compete with the US dollar.”

Money is a tightly regulated and controlled asset. As was evident from the scandals of 2022—such as Terra Luna, Celsius and FTX—poorly regulated crypto projects can do significant damage to individuals’ finances if they decide to invest. The majority of the world’s governments would not allow their financial systems to be built on poorly designed currencies that have not stood the test of time.

But with pro-crypto Trump in the White House, who knows what inroads digital assets will make?

In Australia, the annual inflation rate mostly ranged from 1% to 3% from 2009 to 2021. Due to the monetary stimulus to keep the economy afloat during the Covid-19 pandemic, the annual inflation rate rose to above 7% during 2022, and is only now, in 2024, returning to a more sustainable level.

When you compare the average yearly return of BTC—at over 1,400%—and compare it with the inflation rate, it is quite obvious that the largest cryptocurrency has substantially outperformed inflation.

There is some debate about whether BTC will continue to outperform inflation, with some critics using periods of poor performance of the crypto markets as an example of digital assets failing as an inflation hedge.

“Crypto failed the test as an inflation hedge. If it’s possible to give it an F-, that’s how it performed,” says Procasky.

However, it’s important to remember the stratospheric rise of the markets since the start of the pandemic. Bitcoin fell below $US5,000 when the pandemic really began to shake the world, yet rose past $US69,000 18 months later. Even after a tough year in 2022, it still sat at over $US28,000 by mid-2023. Now, with the pro-crypto Trump returning to the White House, BTC has reached a fresh high of $US76,000 as of November 8, 2024.

In Australia, the Australian Taxation Office (ATO) has specific rules regarding the taxation of cryptocurrencies. Understanding these is crucial if you’re considering investing in crypto assets, as they can have significant implications on your tax obligations.

Capital Gains Tax

In Australia, cryptocurrencies are subject to capital gains tax (CGT). The ATO considers cryptocurrencies not just as a digital currency but as an asset. This means that whenever a crypto investor disposes of their cryptocurrency—be it through trading it for another cryptocurrency, selling it for fiat currency, or using it to purchase goods or services—a CGT event occurs. Therefore, all such transactions need to be reported.

This even extends to crypto-to-crypto transactions, even if they are facilitated on a decentralised platform. For instance, if you exchange Ethereum for another token or NFT, this transaction would trigger a CGT event, and the capital gain or loss must be recorded and reported. The same applies when using crypto to purchase goods or services with some exceptions.

For longer-term investments, a CGT discount may be applicable if you’ve held the cryptocurrency for more than 12 months.

Income Tax

Beyond CGT, income tax also plays a vital role in crypto taxation. If you’re earning income through cryptocurrency mining, participating in DeFi protocols, staking, or earning interest on your holdings, these are considered assessable income and should be declared in your tax return.

It’s crucial to note that on-chain activities can be traced. Therefore, any earning activities from DeFi protocols and similar platforms need to be accurately reported. The ATO has made it clear that it is closely monitoring cryptocurrency transactions, and failing to report such income can result in penalties.

Crypto tax software can be extremely helpful to help maintain thorough records of your transactions.

As always, given the complexity and rapidly evolving nature of the cryptocurrency space, consulting with a tax professional who understands the intricacies of cryptocurrency taxation in Australia is highly recommended.

If the world continues to embrace technology and continue trending toward digitization, then there is a strong case that top crypto projects will continue to grow and carve out their niche in the new digital era.

The main concern for crypto’s long term adoption, and thus, its potential as an investment, are the tough regulatory headwinds that digital assets face by a few, significant countries. Namely, the US has been cracking down on crypto during 2023 with multiple allegations made to crypto exchanges like Coinbase and Binance. However, with a crypto-friendly Trump now in the White House, the make-up of the SEC and its focus may change.

Andrew Rosen, CFP, president of Diversified LLC, says: “While I think that the underlying technology of blockchain has innovation and practicality, until it is decoupled from the gamble of currency without regulation, it’s too risky.”

However, the potential reward if the digital asset industry can get past this initial regulatory battle could be tremendous for investors who play it right. The entire crypto market is still minuscule when compared to traditional assets like commodities, equities or property.

If regulation does stifle the crypto markets, rather than merely offering guardrails and consumer protections, there is every chance that crypto could experience a significant downturn and fade into oblivion. This is a potential scenario that every crypto investor should be aware of.

The final determination about whether you should invest in crypto can only be answered by one person: you. Before investing in any cryptocurrency, you must do your own research in the project you are looking at investing in.

It is extremely important to note that not all cryptocurrencies are created equal, and if you are new to crypto investing, it is recommended to explore “blue-chips”, like bitcoin and Ethereum before delving into other, smaller projects.

Whatever you decide to invest in, take your time thinking about how this addition to your portfolio will help you reach your investing goals. If you are unsure about anything, it is always recommended to speak to a financial advisor to get professional advice before proceeding.

“There are other assets out there you can speculate in. It doesn’t have to be crypto, but if you believe long-term there’s a role for it and you believe in blockchain technology, then there’s a thesis for it,” says Procasky.

This article is not an endorsement of any particular cryptocurrency, broker or exchange nor does it constitute a recommendation of cryptocurrency or CFDs as an investment class.  Cryptocurrency is unregulated in Australia and your capital is at risk. Trading in contracts for difference (CFDs) is riskier than conventional share trading, not suitable for the majority of investors, and includes the potential for partial or total loss of capital. You should always consider whether you can afford to lose your money before deciding to trade in CFDs or cryptocurrency, and seek advice from an authorised financial advisor.