Investing in Cryptocurrency through Self Managed Super Funds (SMSFs)

Traditionally, self-managed super fund (SMSF) investors have invested in four asset classes – Australian equities (especially of the fully franked variety), property (residential and commercial), cash and terms deposits and trusts (listed and unlisted).

What are the SMSF investment options?

As of December 2020, ATO statistics show these assets comprised 83.4% of total net SMSF assets of $732 billion. Shares led the way at $202 billion (27.6%), followed by cash and term deposits at $151 billion (20.6%), trusts at $139 billion (18.9%) and property at $119 billion (16.2%).

Over the years, it has not varied greatly with the December 2015 ATO statistics telling a similar story. Shares and cash were higher, but not markedly, at 30.4% and 26.4%, respectively, trusts slightly lower at 14.5% and property treading water at 16.3%. Taken as a collective, these four assets comprised 83.4% of total net assets at 31 December 2020 compared with 87.6% five years earlier.

How have the SMSF Investment options changed?

So, while the asset mix has not shifted greatly, it has shifted, most notably away from cash and term deposits. One suspects even for the most conservative of SMSF investors, the miserly rates on offer must be encouraging them to look elsewhere for better returns.

The anecdotal and physical evidence suggests they are looking at other asset classes outside the “big four” for capital growth and income. ETFs, for example, have given SMSFs the opportunity to invest in assets such as gold, overseas shares, commodities, and infrastructure via a simple format that also offers that attribute treasured by SMSFs – liquidity. So, too, cryptocurrency, and the evidence is not just anecdotal with this asset.

Why are people investing in cryptocurrency in their SMSFs?

In June 2019, cryptocurrency appeared as an asset class on the ATO statistical survey of SMSFs for the first time with $177 million invested. That number slipped over the following quarters to come in at $168 million in December 2020, a trend, one suspects, that will be reversed when the March 2021 asset numbers are revealed in the wake of the recent market rally.

It’s a toe in the water investment approach; not a dive off the 10-metre board. At $168 million, it represents just 0.022% of total net SMSF assets.

But clearly, some SMSFs have a taste for cryptocurrency, and the current market activity can only generate more interest, with the added attractions of capital gains and the opportunity to diversify their portfolios even further, especially at a time when bonds and cash are delivering historically low yields. At the same time bitcoin (the most actively traded of the cryptocurrencies) is being seen as an alternative to gold as a store of value.

For those SMSFs that have taken the plunge, the returns have been nothing short of staggering, as the following numbers highlight.

• In April 2020, bitcoin’s price was hovering around $A12,000. A year later it has grown 450% to $A66,000;
• In 2021, bitcoin has reached three new record highs, the most recent being $A84,000;
• In February, the global cryptocurrency market capitalisation exceeded $US1 trillion; and
• Bitcoin is increasingly being seen more as a store of value, little different to precious metals such as gold. In a note to investors in January, the global financial services firm JPMorgan said bitcoin could rally as high as $US146,000 in the long term as it competes with gold as an “alternative” currency, adding the proviso that its volatility would need to drop substantially to do so. It was a far different position to that once held by JPMorgan CEO Jamie Dimon when he called bitcoin a “fraud”.

SMSFs are typically cautious investors; how else to explain cash and term deposit holdings still at 20.6%. They could be expected to be acutely aware of its volatility, with their investment decisions depending on whether they are in the accumulation or retirement phase, the fund’s risk profile and where fund members are at in their superannuation journey.

What should I consider before investing in cryptocurrency?

For those in the accumulation phase, it’s Cointree’s experience that SMSFs are more prepared to take a bigger risk as their focus is on growing their funds under management, while for those in the retirement phase is far more cautious approach with cryptocurrencies typically a smaller percentage of their portfolios. Either way, the key theme emerging is that any SMSFs cryptocurrency investment must dovetail with the goals of the fund and align with the investment strategy.

But there remain roadblocks to SMSF investment in cryptocurrency. Being relatively new, many SMSFs remain wary, a classic case of it’s better the devil you know. Perhaps more importantly, many SMSFs use specialist advice, and many advisers lack the knowledge and experience with this type of investing.

But this is changing. Cryptocurrency is proving to be an attractive option for many SMSFs that have done their research and are comfortable with the risk. If JPMorgan can change its tune, so can they.

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