The rising popularity of cryptocurrencies (also referred to as ‘crypto’) represents one of the biggest shake-ups of the financial industry in recent history. Digital coins are becoming increasingly favored by consumers who appreciate a form of money not regulated by any one government, and those who see it as a sound investment opportunity.
Australian investors aren’t willing to be left behind, with almost one in five Australians actively investing in digital currency to diversify their portfolios; the most popular options among Australians are Bitcoin, Ethereum, and Ripple. As with any investment, trading crypto is not without its risks; if you’re a budding crypto trader, it’s important to understand exactly what the currency is, and to explore tips that will help you to trade locally.
What is cryptocurrency?
Cryptocurrency is essentially digital money. Unlike standard legal tender, cryptocurrency has no physical notes or coins and is typically stored in an online or hardware-based virtual wallet. It is also not controlled by the governments of any one country, meaning that investors in 131 countries can trade it on exchanges found on reputable sites such as Crypto Head. Although seen by many as purely an asset to invest in, digital money is designed to be a functional currency; there are more than 300,000 daily transactions processed globally via Bitcoin alone.
What types of cryptocurrency exist?
In recent years, multiple forms of cryptocurrency have been launched. To name a few:
- Bitcoin (BTC): Arguably, the most recognizable cryptocurrency is Bitcoin. Bitcoin was created in 2009, and was put on the market in 2010 for AUD$0.01. While the price experienced relatively slow growth during its first few years, Bitcoin has since exploded in value. There are currently 18.5 million bitcoins in circulation, valued at a collective USD$1,386 billion.
- Ethereum (Ether or ETH): A lesser-known form of cryptocurrency compared to Bitcoin. “Ether” is a digital token used as currency by the users and developers of apps. Ethereum was created to help creators regain control over their apps from major app store owners such as Apple and Android. Billionaire investor Mark Cuban has described Ethereum as the closest crypto to a true currency, and it makes up 30% of his digital currency portfolio.
- Ripple (XRP): While not intended for individual users, Ripple is designed to help larger companies move significant sums of money worldwide. The main drawcard of this coin is its digital payment protocol, which can facilitate 1,500 transactions per second in any form of currency.
- Altcoins: Not a cryptocurrency in itself, altcoin refers to any digital coin that is not Bitcoin. Popular altcoins include Litecoin (LTC), Dogecoin (DOGE), and Binance Coin (BNB). Litecoin was designed in 2011 by a former Google employee, who was able to replicate Bitcoin technology while improving transaction times and fee levels. Investors such as Mark Cuban hold smaller amounts of altcoins in their crypto portfolios for diversification.
Four Tips for Trading Crypto in Australia
If you’re interested in trading cryptocurrencies, here are some steps that you can take to minimize your risk and make an informed decision about your investment:
- Consider your portfolio
Many finance professionals believe that the key to a successful investment portfolio is diversification. The idea behind diversification is that if one of your investments is not performing well, you’re likely to have other stocks or interests that may help to balance out your losses.
If you already have property or share assets, cryptocurrencies may be a good option to ensure that you have a balanced portfolio. Similarly, if you currently have a sum of coin, consider branching out and purchasing a different form of cryptocurrency, as they may experience different peaks and falls in value. In a recent interview, Ric Edelman (founder of Edelman Financial Engines) reported that financial advisors are seeing an increased demand from their clients to diversify their investments; using this strategy could help to minimize your risk if any of your assets fail to perform.
- Make a risk assessment
Like with any investment, it’s important to research your options to make an informed choice on whether they’re right for you. Consider how much money you’re willing to invest without causing undue financial stress, and whether you’re comfortable investing in a potentially unstable asset. As it’s a relatively new form of currency, crypto is in a price-discovery phase where significant swings in value are common. While some investors may see this volatility as a sign of long-term instability, others take comfort knowing that the value of gold was similarly unpredictable when it was unlinked from the monetary system in the 1970s.
There are many misconceptions about Bitcoin and cryptocurrency in general; speaking to experts and doing your due diligence is critical prior to making any purchases or trades.
- Ensure that the exchange is authorized
One of the most critical tips for trading cryptocurrency in Australia is making sure that the exchange you’re using is authorized to operate in the country. Cryptocurrency exchanges are one of the most straightforward ways to invest in or trade digital currency, and there are many to choose from. A reputable resource such as Crypto Head can assist you in finding the best exchanges local to each major country; any exchanges operating in Australia must be registered with the Australian Transaction Reports and Analysis Centre (AUSTRAC).
- Discuss any trades with your accountant
There are some tax implications that you need to be aware of as an Australian trading cryptocurrency. In Australia, cryptocurrency is treated as property and subject to the Capital Gains Tax (CGT.) If you take part in mining or staking efforts to gain more digital coin, this income will fall under regular income tax. Any cryptocurrency deals with foreign exchanges may also come with tax consequences in the associated nation. The Australian Tax Office (ATO) recommends for anyone who’s involved in cryptocurrency transactions to keep good records of them; your accountant can help you navigate the tax implications of cryptocurrencies, but they’ll likely need the relevant information to do it.
One of the most critical tips for trading cryptocurrency in Australia is making sure that the exchange you’re using is authorized to operate here. Although Bitcoin and other cryptocurrencies may seem like an easy way to build your wealth, any investment that you consider should be carefully planned out. Prior to trading crypto or investing in any of them, ensure that the exchange is licensed to operate in Australia, and discuss your personal situation with a financial expert.
If you’re looking to add to a diverse portfolio, or you’d simply like to use an alternate form of money, digital currency could be a good option for you.
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