What is Cryptocurrency?
The number of people invested in Cryptocurrencies has risen significantly over the last year with some estimating that one in 5 Australians own Crypto.
What is Cryptocurrency?
Cryptocurrency is a digital currency in which transactions are verified and maintained on a blockchain. The system is intended to be decentralised as it is distributed across a large network of users rather than being controlled by a centralised authority such as a bank or a government.
Most people who think about Cryptocurrency will think about Bitcoin but there are a large number of different coins and tokens which have different uses. Bitcoin has been compared to gold in that it is seen by many as a store of value but its utility is low. Ethereum, the second largest coin, has more uses and has had a lot of different projects built on it. There are many other cryptocurrencies which focus on uses such as:
- Decentralised finance (De-Fi) where people can lend or borrow directly without the need for a centralised intermediary like a bank
- NFTs (non-fungible tokens) which provide ownership of various digital assets such as artwork and gaming tools
- Metaverse tokens which are used in virtual worlds allowing virtual experiences and play to earn games
- Stablecoins, which are generally pegged to the US Dollar and allow transactions to take place using a currency more stable than the currently volatile cryptocurrencies
- Other uses such as decentralised internet, decentralised data storage, exchange tokens and cross chain operability
Where can Cryptocurrency be traded?
The easiest way to trade cryptocurrency is by setting up an account with an exchange. These work in a similar manner to online share brokers like Comsec although security is not as high. Some of the well known Australian based exchanges are Swyftx, CoinSpot, Independent Reserve and BTC Markets. Each exchange lists different Cryptocurrencies and charge different trading fees so you’ll need to research whether the coin or token you want to buy is listed on the exchange and what the most competitive fee is.
When setting up an account you’ll need to consider what ownership you will be buying under and consider the tax consequences. Crypto can be bought under an individual name, joint name, Company, Trust or SMSF. SMSFs have more complicated rules and you can read more about that in our article here.
When buying shares online, the ultimate ownership usually rests with the account holder and the shares are registered in your name with the share registry. There are some exceptions to this with some newer low fee share brokers. However with Crypto exchanges, if you leave your crypto on the exchange, it is held by the exchange on your behalf. Therefore if the exchange went bankrupt or the exchange was hacked you may lose your holdings. To avoid this you can take personal custody of your crypto through your own personal wallet which can be online (where hackers could still access it) or offline (which requires hardware and remembering/safely storing security codes). If you forget the codes and lose the recovery seeds, you have lost your investment.
How can Cryptocurrency be used?
Some of the use cases for Cryptocurrency were touched on above. You can lend using decentralised finance, you can buy digital artwork or use it in games. There are also limited things that can be paid for using Crypto. You could also simply hold it as an investment or stake it. Staking your cryptocurrency is similar to earning interest in a bank or reinvesting dividends from shares. Rates can vary from 5% to 200% depending on the crypto. Most staking will involve locking up your crypto so that it cant be traded for a period although some exchanges offer staking with no lock up period. Not all coins and tokens can be staked.
It should be noted that all of the transactions listed above have tax consequences. Any time a cryptocurrency is sold or used in a transaction, a tax event is triggered. Staking income is also taxed. Further information on tax consequences can be found in our article here
