Demystifying Cryptocurrency
What Every Australian Should Know Before Investing
Cryptocurrency might seem overwhelming, especially if you're not well-versed in financial jargon. You listen to all of your more financially-savvy friends talking about how much money they’re making with crypto and it’s frustrating because you feel out of some mystical, exclusive club that you simply can’t find your way into… right? But have no fear — we're here to break down everything you need to know about the intricacies of cryptocurrency. By the end of this blog, you'll have a better picture of how to get started with this realm of finance.
Maybe a good first question to delve into first is – what is cryptocurrency?
Essentially, cryptocurrency is a digital asset that operates on a technology called blockchain. It can be used for transactional purposes, like currency, or like assets and held for trading or investing. Unlike traditional money (like our Australian dollars), which is issued and regulated by central banks, cryptocurrency is decentralised. This means it’s not controlled by any single government or financial institution.
The blockchain is a public ledger that records every transaction made with a particular cryptocurrency. Think of it like a giant, digital spreadsheet that everyone in the world can see and verify but that no one person controls. Every time someone buys, sells, or transfers cryptocurrency, it’s recorded on this blockchain, and it’s nearly impossible to alter or tamper with these records.
One of the main appeals of cryptocurrency is its security. Due to the way the blockchain works, transactions are highly secure and private, making it difficult for hackers to steal or manipulate the data.
But… How does it work?
Cryptocurrency is created through a process called mining. This involves using powerful computers to solve complex maths problems. When these problems are solved, new cryptocurrency coins are generated as a reward.
If you don’t want to mine cryptocurrency yourself, you can also buy it from places called brokers. After you buy it, you store your cryptocurrency in something called a digital wallet. This wallet is like an app on your phone or computer that keeps your cryptocurrency safe and allows you to spend or send it whenever you want. It can be online (on an exchange or on another software wallet/app) or offline on what's called a “hardware wallet” - a physical device you connect to your computer which stores the cryptocurrency on it. The hardware wallet is highly recommended for security and protection.
So then, what is Bitcoin and why is it on the rise?
Bitcoin was the first cryptocurrency, created in 2009 by an anonymous figure known as Satoshi Nakamoto. What makes Bitcoin special is that it was the first successful attempt to create a decentralised currency that could be used for peer-to-peer transactions without needing a middleman, like a bank.
Bitcoin is often called "digital gold" because, like gold, it has a limited supply. There will only ever be 21 million Bitcoins, and this scarcity is one reason why its value has increased dramatically over time.
But why is Bitcoin on the rise now? There are a few reasons, including —
Increased Incorporation — More companies, from small businesses to large corporations like Tesla, are accepting Bitcoin as payment. This has made Bitcoin more useful and increased its demand.
Institutional Investment — Large financial institutions, like hedge funds and mutual funds, are starting to invest in Bitcoin as a way to diversify their portfolios. This influx of capital has pushed up Bitcoin’s value.
Inflation Hedge — In uncertain economic times, many investors see Bitcoin as a hedge against inflation, similar to how gold is viewed. As governments print more money and devalue traditional currencies, the fixed supply of Bitcoin makes it an attractive alternative.
Technological Advancements — Improvements in blockchain technology, like the development of the Lightning Network, have made Bitcoin transactions faster and cheaper, further boosting its appeal.
I’ve heard a lot about adding crypto to my assets, but how does Australia treat cryptocurrency as a financial asset?
In Australia, cryptocurrency is treated as property, which means it is subject to capital gains tax (CGT). If you hold onto your cryptocurrency for more than 12 months and then sell it, the profits are taxed at a reduced CGT rate, which can be up to 50% lower than your regular income tax rate. This is known as the CGT discount and is designed to encourage long-term investment.
However, if you sell your cryptocurrency within 12 months of buying it, any profit you make is added to your regular income and taxed at your usual income tax rate. This means you could end up paying more tax if you sell your crypto too quickly.
The way you hold your cryptocurrency—whether in your name, through a trust, or a company or self managed superannuation fund —can also affect how much tax you pay. For example, holding crypto in a company structure might offer SOME tax advantages, but it also comes with more complex reporting requirements. It’s crucial to get the structure right to maximise your tax efficiency.
Sounds great, where can I start buying cryptocurrency in Australia?
If you’re looking to buy cryptocurrency in Australia, there are several reputable platforms and exchanges where you can do so. Here are a few recommendations —
Ainslie Wealth: Ainslie Wealth is one of Australia's oldest bullion and cryptocurrency dealers. They offer a range of services, including secure storage options and personalised customer service, making it a good choice for both beginners and experienced investors.
Caleb & Brown: Caleb & Brown is a boutique cryptocurrency brokerage that offers tailored services for its clients. They provide personal brokers who can guide you through the buying process, help you manage your portfolio, and offer advice on market trends.
Independent Reserve: This exchange offers a wide variety of cryptocurrencies and is known for its strong security features and compliance with Australian regulations. It’s a good option if you’re looking for a platform that balances ease of use with robust security.
Swyftx: Known for its low fees and user-friendly interface, Swyftx offers over 200 cryptocurrencies and has a strong customer support team to assist with any questions.
Many other exchanges exist such as Binance, Coinbase, Coinspot, however be certain about fees involved and whether you can “cash out” when you would like to take any profits or positions after disposing of crypto.
For our expats in Indonesia, Indodax is one of the leading cryptocurrency exchanges. It’s a popular platform for buying, selling, and trading a wide range of cryptocurrencies. It’s user-friendly and supports transactions in Indonesian Rupiah, making it a convenient choice for local investors.
We want to iterate and reiterate that when using any exchange, it’s immensely important to understand the fees associated with transactions, the security measures in place, and the level of customer support available. Always do your due diligence before choosing a platform.
Okay so what are VPNs and Protection Software?
When dabbling in creating your cryptocurrency portfolio, security should really be your top priority. Unlike traditional bank accounts, where fraudulent transactions can often be reversed, cryptocurrency transactions are irreversible. This means that if your crypto is stolen, there’s absolutely no way to get it back.
To protect yourself, we strongly recommend using a VPN (Virtual Private Network) when accessing your cryptocurrency accounts. A VPN encrypts your internet connection, making it much harder for hackers to intercept your data. This is especially important if you’re accessing your accounts over public Wi-Fi, which is more vulnerable to attacks.
In addition to a VPN, consider investing in protection software that can help secure your digital wallet and prevent unauthorised access. Here are some popular software options:
Bitdefender Total Security: This software offers comprehensive protection against viruses, malware, and other online threats. It also includes a VPN and a secure browser for online transactions.
Norton 360: Norton provides strong security features, including real-time threat protection, a VPN, and a password manager, making it a good all-in-one solution for protecting your crypto assets. McAfee is an alternative to Norton 360, however it does have some limitations also.
Ledger Live: If you’re using a hardware wallet like Ledger Nano, Ledger Live is the official software to manage your crypto assets securely. It also allows you to check your balance and track your transactions in real-time.
What software should I use for managing my crypto transactions?
Managing your cryptocurrency portfolio can be challenging, especially when it comes to tracking your transactions and calculating your tax liabilities. Fortunately, there are several software tools out there that are designed to simplify this process for you —
Koinly: Koinly is a popular crypto tax software that helps you track your transactions, calculate your capital gains, and generate tax reports. It supports multiple exchanges and wallets, making it easy to sync all your data in one place.
CoinTracking: CoinTracking offers a comprehensive platform for managing your crypto portfolio, providing detailed reports on your trades, profit/loss analysis, and tax calculations. It also has a mobile app, so you can manage your portfolio from anywhere.
Crypto Tax Calculator: This tool is specifically designed for Australian tax reporting. It simplifies the process of calculating your crypto taxes by integrating with your exchange accounts and generating accurate tax reports based on Australian regulations.
These tools can save you time and help make sure that your tax returns are accurate, reducing the risk of audits or penalties.
How is cryptocurrency taxed differently around the world?
Cryptocurrency taxation varies immensely from country to country, and it’s important to understand the rules in your own jurisdiction to avoid unexpected tax bills.
In Australia, as we’ve already gone over, cryptocurrency is treated as property and subject to capital gains tax. The tax rate depends on how long you hold the asset and the structure in which it is held.
In Indonesia, the situation is a tad more complex. The tax treatment of cryptocurrency is still somewhat unclear, and there have been cases where the government has restricted the use of cryptocurrency by tourists. While there is no explicit tax law governing crypto in Indonesia, some transactions may be subject to income tax, and the government is reportedly working on clearer regulations. It’s advisable to consult with a tax professional if you’re trading or holding crypto in Indonesia to ensure you’re in compliance with local laws.
Globally, the tax treatment of cryptocurrency can vary widely, for example —
In the United States, crypto is also treated as property, but the IRS requires detailed reporting of every single crypto transaction, which can be a complex and time-consuming process.
In Japan, cryptocurrency is treated as miscellaneous income, and profits are taxed at rates that can be as high as 55%, depending on your income level.
In Germany, cryptocurrency held for over a year is tax-free, making it a very attractive jurisdiction for long-term investors. There are many other jurisdictions in Europe that have similar regulations.
Singapore and Hong Kong can have no capital gains tax on crypto but there could be sales tax and fees on purchases.
Given the varying regulations around the world, it’s immensely beneficial to consult with a tax expert who understands the local laws in your jurisdiction. This will help you minimise your tax liabilities and avoid any potential legal issues. Further to this blog, we will provide a detailed list of jurisdictions and the tax implications of crypto.
What do I need to be wary of when investing in crypto?
While cryptocurrency does offer exciting investment opportunities, it’s important to be aware of the potential drawbacks before diving in.
One of the major cons is its high volatility. Cryptocurrency prices can fluctuate dramatically in short periods, leading to significant losses for investors who aren’t prepared for these sudden changes. This instability can make it difficult to predict returns, and the emotional toll of watching investments swing wildly can be really challenging for those who aren’t used to it.
Another concern is the lack of regulation and consumer protection. Unlike traditional financial systems, cryptocurrencies operate in a largely unregulated space. This means that if your funds are lost due to hacking, fraud, or a failed exchange, there’s often no way to recover them. Additionally, the anonymity that cryptocurrencies allow can also be exploited for illegal activities, which has led to increased scrutiny from governments worldwide. This regulatory uncertainty can create an unpredictable environment for investors, with potential legal changes that could impact the value or usability of certain cryptocurrencies.
Lastly, the complexity of cryptocurrency technology can be a barrier to entry for many people. Understanding how to securely store, manage, and transact with cryptocurrencies requires a steep learning curve. Mistakes, such as sending funds to the wrong address or losing access to your digital wallet, can lead to irreversible losses. This complexity, coupled with the fast and ever-evolving nature of the crypto technology, makes it essential for investors to stay informed and mindful to avoid costly errors.
So, what are my next steps from here then?
Cryptocurrency is an exciting but complex world, and it's important to approach it with a solid understanding of the risks and rewards. Whether you’re looking to buy your first Bitcoin, manage a growing portfolio, or optimise your tax strategy, being informed is your best asset.
If you’re still unsure about any aspect of cryptocurrency investing and want to learn more — whether it’s where to buy, how to protect yourself, or how to manage your taxes — don’t hesitate to reach out to FRE.DM Wealth for a consultation. We can help you navigate the complexities of the crypto world and develop a strategy tailored to your financial goals and dreams.
Understanding cryptocurrency is key to making informed decisions and maximising your investments. Whether you're just starting out or looking to refine your strategy, having the right knowledge and tools can make all the difference.
Stay informed about the latest developments in crypto regulations, use secure practices to protect your assets, and leverage reliable tools for managing your transactions and taxes. By taking these steps, you’ll be better positioned to navigate the exciting and evolving world of cryptocurrency.
