NICK BRUINING Q+A: Bitcoin’s wild swings proves cryptocurrency bet is the ultimate mug’s game

Question

I have been talking with my grandchildren regarding different types of investing.

They keep telling me about their friends who have “made a fortune” by investing in new investments based on cryptocurrencies, citing crypto as a new type of gold.

I am trying to mount a plausible argument against this approach because they are talking about investing all of their savings into this asset.

Can you provide any arguments to help me out?

Answer

The concept of investing means different things to different people. Many view betting on horses as a type of investment and, indeed, in the past there have been structured investment vehicles like trusts based on betting “systems” (which subsequently failed).

As an economic purist, I regard “investing” as sticking my money into a real plausible asset, that generates a regular income return. A rental property meets that definition, as does an investment in a fixed-income investment like a bank account, government bond and shares and businesses that pay dividends.

Most other things can be regarded as “speculative”, which is a polite way of saying you’re placing a bet.

In essence, there are no fundamental drivers behind movements in the price of any cryptocurrency asset. They do not generate any income and the only way you can make money is to find someone in the world who is prepared to pay more than you paid.

It is driven by emotion rather than by economic fundamentals. No one can provide me with a sound economic reason why Bitcoin went from $US78,000 in April last year to $US122,000 in October, then down to $US64,000 in February.

No one talks about the “investors” who paid $US122,000 ($175,770).

In reality, the same principle applies with all other speculative assets which include gold, gems and even vacant land.

With my definition of an investment, the regular income return forms the basis of the asset value. Many assets do exhibit both real income returns and a speculative component.

In most cases, however, the speculation is about how the real income returns are likely to be affected by external business and economic factors, not just a punt on the values going up.

Question

I have been self-employed for most of my life.

I have always been suspicious of superannuation and have never invested in any fund. As an alternative, I have invested in residential real estate which has proven to be successful.

However, I have also experienced the problems of having tenants and don’t want to be dealing with them in retirement.

At 66 years of age, I plan to retire in the next few weeks and have decided to sell-up, but expect to make about $400,000 profit.

A friend explained that I may be able to use super to get rid of the tax hit. How does that work?

Answer

If retirement is imminent, you might consider deferring the sale until next financial year. That way, the profit from the sale won’t be added to this year’s income from employment.

As you have held the property for more than 12 months, only half — or $200,000 — would be taxable income. Be aware that the Australian Taxation Office bases the sale date on the contract execution date, not on the date of settlement.

Since you have no super, you are under the $500,000 threshold that allows you to make use of unused, tax-deductible concessional contributions to super.

In simple terms, and if you are still under the age of 67 at the time, you could make a single contribution of up to $175,000 next financial year and claim that as a deduction against the $200,000.

While this will be subject to a contributions tax, it should only be 15 per cent, given that the sale occurs next year and your total income for the year should be under $250,000.

If over that amount, the super fund will deduct an additional 15 per cent contributions tax. Once in place, you can use the super money to generate a tax-free income.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association.