6 Things SMSF Investors Should Consider in 2022

Unlike shares or property, cryptocurrencies are not tied to any company or industry, which means their value can fluctuate wildly over time. This makes it difficult to predict what your trade will be worth at any given point in time. Despite these challenges, there are a few things an SMSF investor can consider before trading:

1. Understand Investing in Crypto is Risky 

It is important to be aware of all risks associated with any trading decision, including crypto trading. The crypto market fluctuates widely and has been known to experience rapid swings in price (i.e., a 10% drop or gain in just one day). Traders can lose some or all of their investment if they purchase at high valuations, sell at low valuations, or if the cryptocurrency goes under - Just like the Terra Luna situation.  

Additionally, there are no regulations governing this space, which means that investors are exposed to fraud and other criminal activity when conducting business on exchanges that may not be trustworthy or secure enough for handling their funds. Therefore, picking the right cryptocurrency exchange to execute your trading is very important.  

2. Know the Crypto Creators and Its Objectives 

After the collapse of Terra Luna, a lot of information about its co-founder, Do Kwon, hit the internet. It painted the picture of a man who was arrogant, reckless, and possibly admitting to running a Ponzi scheme based on an Algorithmic Stablecoin concept that has proven time and time again to fail. Terra Luna was painted as different compared to the other Algorithmic Stablecoins that came before it but was exposed to be no different as it collapsed due to the same inherent flaws of Algorithmic Stablecoins.  

So, it is important to know the creators behind the project and to look for a strong team with a track record of success, ambition, and a well-articulated roadmap with a strong community of believers who are actively following and talking about the project on social media. 

3. Beware the Crypto Pumpers 

A pump and dump scheme is a form of market manipulation. It involves buying a cryptocurrency and then artificially inflating the price by attracting unsuspecting investors to buy in at a higher price. Once enough people have bought into it, the scammers sell their coins for a profit that was made possible by those new investors paying more for the coin than they did—but all this buying creates massive volatility in the market, which can be very risky for everyone involved. 

Pump and dump schemes are illegal under Australian law, but I’d wager you’ve seen them before: usually on Facebook groups or Reddit forums where people share links to hot tips about how to make money from cryptocurrencies (these links often go out at 3 am). They can also happen on social media platforms like Twitter, Telegram, Instagram, and YouTube. And they are sometimes pushed by popular influencers on these platforms who are looking to make money off their subscribers. 

4. Look for Community 

You should also seek out a community of investors, miners, developers, and traders. Crypto communities can provide valuable information about the market that can help you make informed decisions. You should look for communities that have a strong focus on investing like subreddit or Facebook groups.  

5. Make Their Crypto Work for Them 

Cryptocurrencies based on the Proof-of-Work consensus mechanism offer rewards when their native tokens are staked. This is a similar concept to stock dividends, so, not can an SMSF benefit from the possibility of their crypto asset increasing in value, but they can also accumulate more crypto assets the longer it is staked.  

Staking can either be done on the native protocol of the crypto asset or through an exchange. Some exchanges offer staking on cryptocurrencies that are not based on Proof-of-Work. However, this is considered a riskier form of staking as the crypto asset is typically lent out to third parties who are required to return the crypto asset plus some interest which is then distributed to the crypto asset owner. 

This form of staking has been cited as the primary cause of CeFI platforms like Celsius and Voyager filing for bankruptcy and costing crypto investors millions. Some platforms like Digital Surge, only offer on-chain staking which is simple staking of cryptocurrencies on the native Proof-of-Work protocol. This means the cryptocurrency is not at risk as it is simply staked on the behalf of the customer as native staking can be complicated, and sometimes comes with requirements that investors without large crypto holdings cannot meet.  

6. Go in With a Plan 

Before entering the cryptocurrency pool, you need to have a plan—and stick to it. When you invest in crypto, it's important to understand what you're after and how you're going to get there. What are the risks? Are there any additional costs associated with this investment? Are there other potential benefits or consequences that could affect me as an investor? 

If your SMSF is invested in crypto, here are some factors worth considering: 

• Understand the rules around investing in crypto through an SMSF: These vary from state to state so make sure you do your research and understand what’s required before moving forward with an investment strategy within your SMSF. 
• Consider the right strategy for your needs: If this is simply an addition of another asset class (like property) then it shouldn't change much but if it's replacing another asset class then we'd suggest seeking professional advice on how best manage these changes with regards to risk management and diversification of investments within your portfolio. 
• Not all crypto assets are compliant with the Australian Financial Services License (AFSL) requirements. This means that an individual or a financial service provider must have an AFSL to conduct business in Australia, irrespective of whether they operate their business locally or remotely online. Some of the unregulated crypto assets aren't transparent enough or auditable enough to pass muster under the current SMSF auditing standards. These include privacy coins such as Monero and Zcash which use zero-knowledge SNARKS cryptography techniques to ensure privacy through obfuscation of transaction details (i.e., amounts transacted). However, these privacy features make it very difficult for third parties such as auditors to verify transactions by looking at the blockchain data associated with these currencies. 

7. Plan With Taxes in Mind 

Even if you are into technical analysis and consistently looking to take advantage of the dips and surges in the crypto markets with your SMSF it is important to trade crypto with taxes in mind. Crypto like any other asset is subject to capital gains tax, for SMSFs this means a flat tax rate of 15%, however, if you can hold it for at least a year you are entitled to a discount of one-third.  

There are apps out there like Crypto Tax Calculator and Accointing that can help you track your crypto trades from across the internet, so you can plan appropriately before buying or selling any cryptocurrency. This also makes it convenient for your financial advisor to assist you at tax time with filing your taxes.  To read more information on how to report your crypto taxes, click here.