Cryptocurrency investments have captured the interest of investors worldwide, with tales of massive profits and overnight fortunes.
Yet, these success stories often overshadow the reality that cryptocurrency markets are incredibly volatile, with losses capable of being just as swift and severe.
While the allure of crypto investing for a quick win is undeniable, trustees of Self-Managed Superannuation Funds [SMSFs] ought to practise caution.
crucial factors to consider when considering cryptocurrency
SMSF trust deed
First and foremost, ensure your SMSF trust deed allows for cryptocurrency investment. Not all trust deeds allow for cryptocurrency investments, so you’ll need to check yours does if you plan to invest in this asset class.
A well-thought-out investment strategy is an important part of managing risk and achieving your retirement goals. Have you included cryptocurrencies in your SMSF’s investment strategy?
This decision warrants careful consideration due to the inherent risks with cryptocurrency, the high potential for crypto losses to impact retirement savings and the need to balance the fund’s cash flow requirements and liquidity.
crypto’s unique risks
While blockchain technology holds promise for revolutionising finance, it doesn’t mean cryptocurrencies should be treated like traditional investments. Here’s why:
Cryptocurrencies are infamous for their extreme price volatility. The value of these digital assets can skyrocket one day and plummet the next, potentially exposing your SMSF to significant losses.
The regulatory framework for cryptocurrencies is still evolving. Governments worldwide grapple with the effective regulation of digital assets, creating an environment of regulatory uncertainty that can expose your SMSF to unforeseen risks.
lack of intrinsic value
Unlike traditional assets, cryptocurrencies lack intrinsic value. Their worth is driven by market sentiment and speculation rather than tangible assets or cash flows.
security and fraud
Cryptocurrencies are vulnerable to hacking, security breaches, financial mismanagement and to top it all off, fraud. In 2022 there were a number of high-profile crypto failures including the collapse of FTX.
This saw $8 billion of client monies unaccounted for and a founder charged with criminal fraud. There were also several hacks. While FTX and other mega failures make it into the mainstream news, many of the hacks don’t.
How would you substantiate your ownership of crypto holdings to your auditor if your digital wallet was hacked and the coin doesn’t exist anymore? How can you prove to the auditor that it was in fact a hack and not a scam to illegally release your superannuation money? These intricacies add a layer of complexity to managing your SMSF.
how to decide the ownership of your cryptocurrency
When considering the ownership of your cryptocurrency, contemplate the potential consequences of holding it within your SMSF.
This could look like considering how long would it take to recover from a crypto investment loss and how would this impact your retirement savings? Or how long before you can access profits generated by a successful crypto gain if it’s invested in the superannuation environment and you don’t meet a condition of release?
While some people view their SMSF as a playground for experimentation, the sole purpose test makes it clear that this is not the case.
The ongoing Australian government review of superannuation’s definition and purpose, soon to be enshrined in law, underscores the importance of adhering to the sole purpose test: superannuation is a vehicle for retirement and its purpose is to preserve savings and deliver income in retirement.
consider whether cryptocurrencies work with your SMSF
Cryptocurrencies might have a place in a diversified investment portfolio, but whether or not they work with your SMSF is something you should carefully consider.
By keeping your crypto out of your super fund, on the off chance that you strike it lucky, you’ll have access to the wealth before you retire [albeit with some tax to pay].
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