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It seems like Bitcoin is rarely out of the news. But what is it, and should you get involved?
Bitcoin works very differently from normal 'fiat' currencies – those backed by governments that come in the form of notes and coins such as the Australian dollar. As a cryptocurrency , Bitcoin is a purely digital, or virtual, currency that takes the form of online tokens or coins.
In fact, there is a whole range of cryptocurrencies including Ethereum and Litecoin to name a few. However, Bitcoin has attracted the lion's share of attention because of its extraordinary gains – and at times, losses.
As a guide to what has often been a rollercoaster rise, in 2017 Bitcoin leapt from $AUD1,374 at the start of the year to be worth $AUD23,648 by December 2017. The market quickly fizzled out, and by the end of 2018, Bitcoin was worth less than $AUD5,000.
More recently, Bitcoin has enjoyed a resurgence. By Christmas 2020 it was worth $AUD26,400, and in mid-2021 Bitcoin was sitting at around $AUD47,000.
What's especially interesting about Bitcoin is how it is increasingly gaining mainstream appeal. The Independent Reserve Cryptocurrency Index (IRCI) shows one in five Australians own some form of cryptocurrency1. That's despite the fact you can't simply walk into a store and pay for purchases with Bitcoin.
Think of this as a bit like a stockbroker for shares. Just like stockbrokers, crypto exchanges charge fees, so this is something to watch for.
How do you invest in a currency that only exists in the digital world?
The first step to get started with Bitcoin is to set up a 'digital wallet'. This can be a small, portable hardware device or a computer program or online platform. It's used to keep your Bitcoin safe as only you hold the key, or password, to your wallet.
Next, you select a crypto exchange. Think of this as a bit like a stockbroker for shares. Just like stockbrokers, crypto exchanges charge fees, so this is something to watch for.
The key question can be how much you'd like to invest.
Part of the appeal of Bitcoin – and indeed other cryptocurrencies, is that you don't have to buy a whole bitcoin. 'Fractional' investing is possible, and many crypto exchanges let you invest as little as $100.
The downsides
Bitcoin and other cryptocurrencies are not without risk. This is a purely speculative investment based on a rise in the virtual currency's value. You'll receive no ongoing returns as you would with dividends on shares or rent on an investment property.
The other issue is that Bitcoin is not managed by governments. This matters because in 2019, the NSW Cybercrime Squad warned that digital currencies are rapidly becoming a money laundering option for organised crime networks2 . This highlights the importance of choosing a crypto exchange with care.
Bear in mind too, Bitcoin has not always enjoyed a steady uphill run. Plenty of investors have had their fingers burnt.
In 2017 for instance, Australians 'invested' more than $3.9 billion in cryptocurrencies – mostly Bitcoin. More than half those trades were placed in December of that year3. Yet by the middle of that month, Bitcoin started to nosedive, leaving plenty of people out of pocket. And remember, no one rings a warning bell just before a cryptocurrency starts to head south.
There can also be challenges from a tax perspective. Some years ago, the Tax Office clarified that Bitcoin and other cryptocurrencies are not money but are potentially assets subject to capital gains tax4. This can lead to complex tax reporting if you buy and sell cryptocurrencies.
The message is to tread carefully when it comes to Bitcoin and other cryptocurrencies.
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1 https://www.independentreserve.com/static/independent-reserve-cryptocurrency-index-irci-2020.pdf
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The information provided in this article does not constitute advice. The information is of a general nature only and does not take into account your individual financial situation. It should not be used, relied upon, or treated as a substitute for specific professional advice. We recommend that you contact Brentnalls SA before making any decision to discuss your particular requirements or circumstances.
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