Nov 04, 2017  | Tags: Cryptocurrency, Bitcoin

Our Insights

As we discussed in Part 1, cryptocurrency is a form of digital money that facilitates secure and anonymous online transactions.

Everyone seems to be talking about cryptocurrency, whether seasoned finance experts or ‘mum and dad’ investors. Bitcoin, Ethereum and Litecoin are popular examples of the digital currency that are gaining extraordinary momentum – In November 2017, one Bitcoin would cost you $AU8000! 

Is the crypto trend one that you need to be on top of?

The Cryptocurrency Hype

Digital currency is becoming more popular across the globe because of a few benefits:

• Funds can be transferred overseas without incurring fees
• You can make transactions anonymously
• There’s no government or institutional interference

Risks of Investing in Cryptocurrency

But before you dive headlong into the world of cryptocurrency, you need to weigh the risks.

Limited redemption options.

Digital currency is not legal tender or backed by the government, and not all places accept currency like Bitcoin. You can only cash in your digital funds at select sites equipped to do so. So you’re far more limited than keeping actual money in a bank account.

Lacks the protection of government regulation.

It’s great that cryptocurrency isn’t centralised by any one entity. But this freedom also comes with risks. There’s no government regulation to help you secure or recover funds or guarantee the value.

Widely fluctuating value.

A small market and lack of government regulation can lead to dramatic fluctuations in value. You can lose a lot overnight with little warning. This unpredictable pattern of change can also make it a challenge to sell and trade your currency at will.

High risk of permanent loss.

Many people are attracted to the idea of making anonymous transactions. But that anonymity also works in the favour hackers aiming to steal your funds. If you lose money, you have very little chance of tracking it down.

What’s more, the platforms for digital currency trade and virtual wallets aren’t backed by government regulation. If those platforms suffer errors or go bankrupt, your entrusted funds could be lost forever.

Suspicious reputation.

There’s still a shady reputation attached with cryptocurrencies. People with unsavoury motives like the anonymity to carry out tasks they don’t want linked back with their names.

Others may regard you with suspicion if you indicate you want to deal in cryptocurrency. And you’ll rightly need to be wary of others you don’t know well who insist on trading with untraceable digital currency.

Until we have more transparency in the industry, the suspicious stigma is something that has to be accepted.

Not entirely tax-exempt. 

Trade, investment and business deals done with cryptocurrency as well as processes and services related to buying, trading or generating cryptocurrency are in fact still taxable. This is true of using legal tender, as well. You just can’t get into cryptocurrency hoping to be free of all tax obligations.

What Should You Do?

There’s no denying that digital currency is a trend that’s not going away anytime soon.

Have a realistic yet cautious view of the potential. Cryptocurrency is promising, but it’s future is also a volatile one.

Australian Securities and Investments Commission (ASIC) does not yet class cryptocurrency as a financial product and therefore it is not covered by AFS legislation. 

They’re taking a ‘wait and see’ approach to the industry, and in the meantime warning consumers of the risks. Premature action could harm the potential and development of the field.

So until we see some legislation regulating terms of trade and standardising value, you have to invest at your own risk.

Are you curious about the benefits of cryptocurrency? You may be eager to begin your own endeavor. If you’re going to give crypto investment a go, you may want to only invest money you wouldn’t miss if you lost it. Play it safe, it’s early days for you and the cryptocurrency industry!

The possible benefits are massive if cryptocurrency lives up to its potential. For now, proceed with caution, get advice and do your research before attempting to invest.

Read Part 1: Introduction to cryptocurrency

Stay ahead of the trend by seeking professional financial advice from Calder Wealth Management.

Get personalised advice about your investment and financial goals. Contact Calder Wealth Management for a no obligations initial discussion.

- Ben Calder, Private Client Adviser

 

*This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek advice from a financial adviser and seek tax advice from a registered tax agent. Information is current at the date of issue and may change.