Diversification equally important for crypto investors
SMSF investors considering investing in cyptocurrency should take a similar approach to that of equities investing and build a diversified portfolio of digital currencies, according to Mine Digital.
The cryptocurrency exchange provider’s chief executive, Grant Colthup, said that similarly to share investing, while concentrating most of an investment in one asset could produce superior results, from a risk management perspective it was best for investors to look at several digital currencies at once.
“Given that diversification is the only free lunch, it might be worth investors creating their own basket of currencies,” Mr Colthup said.
“While we cannot directly advise people on an investment strategy, we are seeing more investors create their own basket of currencies.”
The digital exchange reported rising interest from SMSF trustees in entering cryptocurrency markets, and said the baskets of currencies created often stretched across five different types of currency with Bitcoin as the main holding.
“A common cryptocurrency basket could be Bitcoin 60 per cent, with a 10 per cent allocation to each of Ethereum, Ripple, Bitcoin Cash and Litecoin,” the company said.
“These coins all have different characteristics with varied market appeal and this diversity should assist first-time investors in seeing if crypto investing is for them.”
Mine Digital added that it may be more efficient for SMSF investors to hold their digital currency assets with an exchange offering insured custody, meaning they were protected in case of hacks.
“Insured custody minimises the loss to the investor in case of a hack or employee malfeasance,” the company said.
“It also means that investors do not need to take responsibility for the management of their own ‘keys’. On the other hand, self-custody of crypto assets means users must safely keep and guard their keys in order to access their holdings.”
Mr Colthup said with the cryptocurrency market set for further growth in the coming year, now was the time for investors to do their research as to the best exchange provider for them.
“The exchange that people choose must be secure, robust and offering ways for investors to actively manage the risk of their crypto assets,” he said.
“We expect several new offerings will come to market in 2020; thus, investors should do their due diligence now, such that they can be well placed when these opportunities arise.”