Simon Ho, COO and head of SMSF at CoinStash, said on the latest SMSF Adviser podcast that there are numerous ways to gain exposure to crypto assets – an area warranting more discussion regarding investment strategies.
“The first way is to buy the asset directly, which means you hold the underlying assets yourself, similar to cash,” Ho said.
“Another way is to buy it through something like an ETF, a financial product where there is a regular wrapper around it, and then you get a third-party custodian and the benefits of a regular regime in case something goes wrong.”
Another way to invest in cryptocurrency is through derivatives, he said, whether that’s a contract for difference (CFD) or other types of products, however, he warned that SMSFs need to be careful about those types of instruments.
“The reason is not only from an investment point of view, but also from a counterparty risk and also regulations because you’re not actually holding the underlying assets. You’re getting exposure to it, and in most cases, any derivatives exchanges are not on the approved body list under the SIS Act.”
He also mentioned that another way to gain exposure to the asset class is by purchasing bitcoin miners and placing them in a data centre for depreciation.
“Those miners will generate some rewards most often in bitcoin, and they get deposited to a cryptocurrency wallet of your choice,” he said.
“There are many ways to get exposure to cryptocurrencies and each person, or investor, has their own reason for investing in bitcoin.”
One of the most common reasons investors invest in bitcoin and cryptocurrency is that they are a geopolitical hedge, he added.
“If there’s any uncertainty around something like an international political regime, or if there’s any potential wars or conflicts or uncertainty in the world that revolves around politics and how countries interact with each other, then typically markets don’t like uncertainty and they price themselves down.”
“But bitcoin is commonly seen as a hedge against that. And I think that’s the line of reasoning that BlackRock and some of the major bitcoin ETFs have promoted. They say that Bitcoin is neither a risk-on or a risk-off asset. Instead, it’s a geopolitical hedge.”
He continued that a second narrative around bitcoin investment is that it is a superior form of gold.
“The most common reason for picking bitcoin over gold is the fact that it’s more easily transportable and easier to secure. You don’t have to rely on third-party custodians, and I think that means something to people.”
Some investors look at bitcoin through a monetary lens, Ho said.
“I’m sure people have heard this a lot, especially back in the early days, where if money supply goes up, then asset prices should go up as well, because people say quite casually, when the government prints money, the real dollar value of the of the purchasing power goes down.”
“So bitcoin is a hedge against that … but it’s important to make sure that the reason for investing, particularly for an SMSF, is in accordance with its investment strategy.”
This is a rather interesting legal question. The most interesting aspect relates to the prohibitions on trustees making speculative investments (in the various state Trustee Acts). This has operated to constrain the use of derivates for speculative purposes (as opposed to risk management), making it interesting to consider whether crypto assets are also speculative in nature (and therefore prohibited).