Should I consider cryptocurrency for my SMSF?

Throughout its rather short life, only a decade, the bitcoin has been subject to a range of public perceptions; running the gamut from ‘an obscure experiment for computer nerds’ to ‘explosive speculative commodity’.

In its wake more than a thousand so-called ‘alt-coins’ have joined the ranks of the newest of global asset classes: Cryptocurrency.

Sadly, a great many of the alt-coins (launched through Initial Coin Offerings, an unregulated version of an IPO, in which companies offer discounted ‘tokens’ to be used for later trade in their developing business, on the basis said tokens will start to increase in value once a company commences operation) are doomed to failure. Some are pump-and-dumps, others are outright scams. But most are launched by well-intentioned entrepreneurs, subject to the usual rate of attrition faced by budding businesses.

But at the top of the scale of cryptocurrencies are some incredibly revolutionary technological developments that are now bedded-in for the long haul, not least of which is Ethereum, a platform designed to enable real-time micropayments for machine-to-machine transactions (dubbed ‘smart-contracts’).

The bitcoin itself is maligned by many critics as a doomed technology. Those who realise that questions of inherent value are irrelevant in the face of widespread growth in uptake – the people who realise that blockchain technology is here to stay, will quickly resort to misplaced analogies, such as the one comparing the Bitcoin blockchain to the Model-T Ford.

“You don’t see anyone driving one of those anymore,” they feebly croak, and many are still persuaded by such oversimplification. But in making that particular type of comparison, detractors reveal their ignorance of the fact there were already a number of digital currencies launched between 1993 and 2008, which were ultimately doomed by their inability to solve the key problems of centralised trust, and double-spending.

Satoshi Nakamoto solved both of these problems by implementing a public ledger of transactions maintained on a distributed, peer-to-peer network. If any were to find themselves with an irrepressible urge to stumble down the rabbit-hole of automotive analogies, they might find that Bitcoin is better compared with the invention of the automatic transmission – a technology that has unarguably withstood the test of time, and still plays its part in a much bigger, ever-evolving machine. It’s demonstrative that all cryptocurrencies are based on the original design of the blockchain, and most are simple derivations or ‘forks’ of the Bitcoin core software.

But none have captured the attention of the general public in the way that Bitcoin has done. In recent years the bitcoin has seen many flurries of market activity that resulted in exponential growth in value, followed by commensurate corrections. But after each one of these “bubbles” the bitcoin-buying public picks itself up, dusts itself off, and is joined by a new cohort of converts who witnessed the last wave and bothered to stop and ask what it’s all about.

The bitcoin’s latest price correction, a substantial withdrawal of the sort that should be expected following the explosive growth of late 2017, follows a pattern repeated in the early months of each of the past five years. First quarter corrections in the price of bitcoin are de rigueur for cryptocurrency investors, who regroup and plot a course for the next seasonal boom.

Volatility presents opportunity for capitalisation, and volatility moderates over the long-term. On a one-hour chart the bitcoin is up and down, thrashing around like cornered pig, but give it some room to breathe over a year or three and the chart takes on a certain familiarity.

Back in April of 2001 gold was worth less than US$400 per ounce. By October 2011, after four significant spikes, it had peaked just shy of $1900, and four years later it was back down to less than $1200: explosive growth, followed by correction, and certainly not for the first time with society’s original fungible asset. Now, take that chart spanning 15 years and squash it down to three – that is what the bitcoin has been going through.

Cryptocurrency moves faster than anything we’ve ever seen before. It’s a bull that bucks harder than most have the stomach for, but due diligence is the key to a sound investment, no matter what the time-frame. In order to understand the fundamentals of cryptocurrency, it’s best to start with a book by two Wall Street Journal wordsmiths, Paul Vigna and Michael J. Casey. “The Age of Cryptocurrency” (2015) spells out everything a curious (or healthily sceptical) investor ought to know about Bitcoin, the blockchain, and cryptocurrency in general; it’s a very entertaining read. For those keen to pick me up on recommending an apparently out-of-date text for something as fast-moving as crypto, last week Vigna and Casey launched another book about the blockchain.

If you’ve been reading the press lately, talk of regulation is supposedly met with fear, uncertainty, and doubt – but again, the diligent crypto-investor knows a closely regulated market is a safer, more reliable market. Here in Australia, our cryptocurrency exchanges and brokerages have prepared for compulsory anti-money laundering/know your customer regulation that comes into effect on April 1, and SMEs have already come under the auspices of the Privacy Act on February 22 this year.

Google now states it will cease cryptocurrency advertising from June, following suit with Facebook, and while this appears to be negative news for the market, dedicated crypto-investors welcome the news that pump-and-dump alt-coins, crypto-scammers, and any business ventures relying on advertising rather than underlying innovation are going to be completely flushed out in the digital media rinse cycle. Next on the block is Twitter, so watch this space.

In other news, the bitcoin is declining in value, riding a wave of popular sentiment towards the shore, seeking a floor of support that pundits are incapable of determining with precision. Will it be US$6000? Will it be US$4000? Nobody knows, but what we do know is that this fungible, secure asset is, at time of writing, undervalued. Only one question remains: on which day will this spent wave complete its dribbling march up the sand, and pull back upwards for the build into the next tsunami?

So, what does all of this mean to the Australian SMSF investor? In the words of none other than the great-granddaddy of all crypto-haters, Warren Buffet: “Be fearful when others are greedy, and be greedy when others are fearful”.

Due diligence is the key to sound investment, and by understanding the sentiment-driven cryptocurrency sector follows patterns traced by other conventional commodities (like gold), many will choose long-term backing in a well-established, breakthrough technology with considerable, real-world investment in digital infrastructure. For those with the means, aptitude, and the drive to invest in an SMSF, an under-priced bitcoin in the high-powered crucible of the new cryptocurrency sector is certainly within scope of further consideration.

Ben Hagemann is communications manager at Bitcoin Trader.

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