Written by Shane Stevenson, CEO, Cointree
When cryptocurrency started trading in 2009, it was certainly not front of mind for SMSF investors, especially those in retirement. Even after the Global Financial Crisis (GFC) in 2008, they remained wedded to those traditional mainstays of their portfolios – fully franked Australian blue chips, cash and fixed deposits, and property (residential and commercial).
Even today, these three asset classes dominate the typical SMSF portfolio, with ATO figures to 30 June 2021 showing they comprise 64% of total net SMSF assets of $790 billion.
But markets evolve, and SMSF investing patterns have evolved with them. There is no better example of this than the growing SMSF appetite for cryptocurrency, with the “official recognition” coming in the ATO’s June 2019 quarterly figures that showed, for the first time, that this asset totalled $190 million in SMSF portfolios. Although it’s still a very low number, it means crypto is gaining more attention from the 1.1 million SMSF members who have more than half a million funds.
Since June 2019 it has grown slowly, coming in at $212 million at 30 June 2021. But there can be no doubt that for some SMSFs, especially those with younger trustees in the accumulation phase of their superannuation journey, cryptocurrency, to paraphrase 19th century French novelist Victor Hugo, is an investment idea whose time has come.
Initially, it was Bitcoin that was the main poster Blockchain that attracted the investment interest.
But the market is maturing. One example is the continuing emergence of new coins. In the past two years, blockchains such as Solana, Polkadot and most noticeably Dogecoin have joined the top of the crypto market, with Dogecoin also enjoying a sharp price increase this year. But perhaps even more important is the growing debate around crypto regulation, with every discussion in every jurisdiction just further evidence of how this market is maturing and therefore becoming increasingly mainstream.
We have witnessed cryptocurrency become the national currency in the Central American country of El Salvador, big players such as Tesla and PayPal accepting it as a payment method, as well as the growing conversation around the ability to use crypto to pay for everyday goods and services.
In Australia, it’s not just the crypto SMSF numbers that the ATO is keeping an eye on. In what is further evidence of this asset joining the investment mainstream, the ATO has warned about the capital gains tax implications from investing in cryptocurrency. And any currency held in an SMSF must abide with the extensive regulations that govern SMSFs – the Superannuation Industry (Supervision) Regulations 1994 (SISR) and the Superannuation Industry (Supervision) Act (SISA). Apart from anything else, it requires all transactions must be documented.
In a post COVID market, it means cryptocurrency is likely to have more appeal for SMSF members, especially in the accumulation phase with its promise of strong capital gains, as they look for alternative investment options.
Certainly, SMSFs are acutely aware of the low returns they are receiving from cash and fixed deposits. Over the past 18 months the market has experienced historically low interest rates, a policy position reconfirmed at the RBA’s November meeting where the cash rate was kept at 0.1% and banks said it was not changing until at least February 2022. With Australia emerging from COVID-induced lockdowns (especially in Victoria and New South Wales), and the medical advice suggesting this will lead to a jump in cases, it would be a brave analyst suggesting an imminent rise in the cash rate, a booming housing market notwithstanding.
So, a combination of paltry returns from cash and fixed interest and high prices for residential property, when coupled with a greater understanding of cryptocurrency markets, is likely to encourage more investment into the latter asset class. It has become another tool for diversifying a portfolio away from traditional assets.
None of this is to suggest cryptocurrency is about to replace blue chip shares, cash and property as the mainstay of an SMSF portfolio. The vast majority are far too cautious to take that approach. And the portfolio allocation of those who choose to invest will be strongly influenced by where they are on the superannuation journey. A two-income professional family aged 40 are likely to have a far different outlook on this asset compared with a fully retired couple in their 70s for whom capital preservation is critically important.
One last thought. Anecdotal evidence suggests many financial advisers are still wary of cryptocurrency, shying away from recommending it to their clients. As it becomes more mainstream as a by-product of greater regulatory oversight and increased consumer education, advisers will need to get aboard the “crypto train” – perhaps the final hurdle to investor acceptance.
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Disclaimer: Information provided is for educational purposes and does not constitute financial product advice. You should obtain independent advice from an Australian financial services licensee before making any financial decisions.