How to Invest Into Crypto Using an SMSF
Investing in Cryptocurrency using your SMSF
We are finding more and more of our members are now choosing to invest in cryptocurrencies using their Self-Managed Super Fund.
More Australians are now investing in cryptocurrencies using their SMSF as cryptocurrency can provide potentially high reward investments, despite their high risk.
According to the latest statistics, an average SMSF member balance was $602,385 in March 2017. A typical fund has 2 members, so this can bring up the average SMSF balance to over $1 million.
Most of these SMSFs are invested in shares, property, collectables, gold and silver. Recently more SMSF’s are investing in cryptocurrencies, especially those with lower member balances typically under $100,000.
Given how highly volatile and controversial they are, knowing how to properly invest in cryptocurrencies with an SMSF is important. In this blog post, we will discuss the different types of cryptocurrencies you can invest in, how to purchase them, and how to keep your cryptos compliant with the ATO.
Types of cryptocurrencies you can invest in
Bitcoin is often wrongly used as the name to refer to all cryptocurrencies as a whole. But Bitcoin is just one of the major cryptocurrencies on the market. All others are collectively referred to as altcoins or digital currencies in general.
With an SMSF, your investment strategy is up to you, so you can invest in the cryptocurrencies you choose. Cointree offers over 100 digital currencies on our exchange, you will be able to diversify your portfolio with ease.
Typically, as part of your investment strategy, you would only invest a small percentage of your portfolio into cryptocurrency, please seek professional advice prior to investing.
How to buy cryptocurrency
To buy and invest in cryptocurrency you will have to use an exchange such as Cointree. There are two types of exchanges.
Fiat refers to any Government-backed currencies like the Australian Dollar AUD. So a fiat exchange like Cointree, allows you to deposit fiat into your account, and exchange that for the cryptocurrency of your choice.
Cointree allows you to specifically create a dedicated SMSF or corporate account. This is particularly important when it comes to the auditing process which is explained further down the blog.
These exchanges are quite popular for the more advanced and experienced traders. For an SMSF it’s extremely difficult to audit trading on a crypto-crypto only exchange as each trade for auditing purposes needs to be converted into AUD values. You will need to take note of the exact time, day, the crypto trade information to link that up with the price at the point of time to convert it into fiat value.
Hence why exchanges like Cointree provides the best platform and option for trading cryptocurrency using your super, as your transaction history will have all your trades converted into AUD for auditing purposes.
Cryptocurrency investment strategies for SMSFs
With an SMSF, you have to make sure your investment strategy passes the sole purpose test – that you only benefit from the investments in retirement. This means that when you buy cryptos you do them entirely under your fund and never under your own account. It’s the golden rule of investing in cryptocurrencies with an SMSF!
We are not financial advisors, so we don’t advise on your personal investment strategy. However, many SMSF providers only suggest a buy and hold strategy, HODL and not trade crypto-crypto because this is easier for them to manage when it comes to auditing.
But with Cointree and its partnership with My SMSF, we allow for any trading and don’t limit you on just buying and holding because it's more convenient for us. We will handle your transaction history that will be converted into AUD value and streamline your auditing process.
Keeping your cryptocurrency secure
Keeping your cryptocurrency secure is important, as part of your SMSF compliance you will need to store your cryptocurrency in a cold storage (hardware wallet) out of the exchange. You will also need to provide the ATO with proof of how you are storing it.
The Trezor wallet and Ledger wallet are the most popular and reliable hardware cold wallets on the market currently. As a precaution, these wallets are also stored in bank vaults.
Want to know more about cold storage and where to buy some, see our partners at Coinstop for more information as they specialise in cold storage devices.
Remaining compliant when it comes to auditing
The riskiest part of digital currencies is their exposure to hacks, counterparty risks and the general 24/7 connectivity to the internet, exposing exchange wallets and software wallets to hacking and loss of coin assets.
This is why in order to be compliant with your SMSF, you will need to store it in the hardware wallets also known as cold storage. This allows you to securely store your digital currency outside of the exchange and off the internet.
There are two types of wallets you can store cryptocurrencies on. A hot wallet or a cold wallet. The difference between them is whether or not they are connected to the internet.
Every year there is a major scandal where an exchange gets hacked and thousands of innocent people’s coins disappear.
We therefore highly recommend that you do not keep your investments on an exchange and instead keep them in a Cold Wallet such as a Trezor or Ledger Nano S, which are physical hardware USB sticks that store multiple coins at a time.