Q&A – Understanding Cryptocurrency Investments.
Everyone is talking about crypto currencies these days – for better or for worse. We are often asked about this topic and if it is a good investment decision. Alison Stanbridge, Financial Planner and Chartered Accountant, at dmca advisory answers these questions.
Crypto currencies, like Bitcoin, have gained quite a lot of press over the past decade. Bitcoin has risen from a very alternative form of investment (often associated with fraud and the dark web) to something traded frequently, especially by younger consumers, as if it were a regular investment vehicle. Except it isn’t.
This kind of currency is 100 per cent virtual. It is not money. It isn’t transacted by banks or any regulating authorities. Crypto currencies don’t have a central transaction point. Transactions of the virtual currency units are communicated via a special messaging app and are recorded online via a public ledger. The currency is then stored in digital wallets, with encryption used to verify transactions.
This kind of ‘currency’ is highly speculative with trading prices fluctuating significantly especially in turbulent economic times. A case in point is the way well-known crypto currency exchange FTX suddenly crashed this November — plunging from an eye-watering valuation of $32 billion to the crash pile of companies now facing liquidation or sale.
Crypto is in effect only worth what a buyer is prepared to pay for it at one point in time. Naturally, it is not a form of investment we would recommend to our clients.
Some of the technology behind crypto currencies also raises a number of concerns. As well as the possible connections to criminal activities, there are questions about cyber security and general consumer protections given Bitcoin etc is not overseen by banks or governments. If you lose big time on crypto, nobody will be there to save you.
In addition, and this is a very important message, any profits made from these forms of investments are fully taxable. In fact, the ATO has crypto currency very much on their radar and it expects people who trade in units like Bitcoin or Ether to keep complete records of all transactions — however hard that may be to arrange.
Certainly, these are some things to consider if this is an avenue you wish to pursue in the future.
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