If you’re an ordinary investor, the topic of cryptocurrencies can feel like it’s a bit of an elephant in the room when it comes to decisions about what to invest in.
he Irish are certainly very “crypto-curious”, with one survey by Gemini, a crypto trading platform that recently obtained an Irish e-money licence, estimating that one in five people here own digital currency of one kind or another.
The headlines are undoubtedly attractive. For instance, if you had invested $100 in Bitcoin in 2009, it would be worth around $41m today.
On the other hand, financial advisors find crypto a tricky topic. Not least because, strictly speaking, they’re not allowed to talk to you about it as the area is not regulated by the Central Bank, but the reality is that they’re being asked about it all the time. And while fully acknowledging the massive interest in this relatively new asset class, they’re reluctant to be seen to criticise the willingness of large swathes of people in Ireland – particularly younger folks – to invest significant amounts of their cash into what is patently a risky bet on so many levels.
Dave Quinn, managing director of Dublin-based Investwise, says many of his younger clients are so frustrated with the difficulty of getting onto the property ladder that the hype around bitcoin and other cryptocurrencies as a means to get a house deposit together as quickly as possible is obviously enormously appealing.
“I totally understand that desire and that frustration, so I always go back to the first principles of ‘what are you trying to achieve here?’ And then, what risk are you willing to take with some or all of your money. And, if there’s a portion of that that they’re willing to lose completely, hopefully it’s only a small portion, but I see increasing levels of high allocations to these high-risk investments.”
Nick Charalambous, managing director of Cork-based advisors Alpha Wealth and who has himself invested a small sum in bitcoin, says: “We talk about risk on a one-to-seven scale. I’d say that cryptos are an eight.”
Aside from the lack of regulation – and likely because of this – it’s an area already swimming with scammers.
The Financial Services Ombudsman recently warned of the risks of investing in cryptocurrency after a sharp rise in the number of complaints about it, while Garda sources have told of recent cases where one individual lost up to €1m and others up to €200,000 after being enticed into buying non-existent cryptocurrency.
The Central Bank – along with other EU banking regulators – has also raised the red flag on investing in crypto assets, particularly around the number of social media ‘influencers’ being paid to advertise them. But also about the potential for investors to lose all of their investments.
It’s also much more difficult to make gains in the current market. Ann Hayden, a lecturer in cryptocurrency at the Institute of Investing and Financial Trading, points out: “With [a single] bitcoin valued at $41,000 (€38,170) today and in a range of $28000 to $69000 in the last year, you should take lightly anyone who says they’ve made a killing in the last 12 months. It has not appreciated in value in that time and you would only have made money if you were buying the dips at precisely the right time.”
It’s also tricky to invest in crypto via investment funds, even though specialist funds are clearly being set up.
The Central Bank recently approved –in principle – two qualifying investor alternative investment funds (QUAIFs) with a low level of exposure to bitcoin, but a spokesman was also keen to stress that the “futures do not involve an exchange of physical bitcoin and are cash-settled”.
You’ll also need to have the means to invest in this fund, as a QUAIF is generally available only to professional investors with at least €100,000 to invest.
According to Quinn, you can’t invest in crypto within a private pension contract in Ireland as that route has been shut down by providers and trustees.
A recent report on securities risk by the Central Bank last February ruled out – for now – allowing Irish-regulated funds targeting ordinary, non-professional investors to invest in crypto.
Of course, there’s nothing to stop you investing in crypto using one of a number of trading platforms available here, such as Coinbase, eToro, Gemini, and Bux Zero, and also Revolut, but you’re very much on your own when it comes to the traditional consumer protections that kick in if things go wrong, such as the Investor Compensation Scheme or the Deposit Guarantee Scheme.
Some of the reasons for using crypto as a means of exchange will be undermined when central banks issue their own digital currencies. The People’s Bank of China tested its e-currency during the Winter Olympics in Beijing and the US Federal Reserve and European Central Bank are evaluating their options and researching.
Charalambous saysthat cryptocurrencies by their very nature will always be hard to regulate because it is a form of exchange that exists outside of the banking system.
“I think the Central Bank and the central banks of this world are going to continue to try and push this away. I think more so now than ever, there is a real flight to the quality of normal exchanges,” he said.
Hayden says that, as part of the evolution of digital money, the creation of new central bank-backed digital currencies could represent a fundamental shift in the way that people interact with money.
“We could arrive in a world your current account will be in your digital wallet, rather than with a local bank, and your transactional history traceable on the central bank’s blockchain with retail banks remaining in a lending capacity and to provide savings products.”
In the meantime, if your FOMO (Fear Of Missing Out) is too much to bear and you’re adamant about having crypto as part of your portfolio, consider these tips.
1 Consider investing in a newer digital currency
Hayden advises putting a small amount of your money (“an investment you can afford to lose”) into a new cryptocurrency. “There are more than 4,000 other crypto currencies and some of these newer ones have much faster and cleverer blockchain technology than the parent, bitcoin.
“I like to think of cryptocurrencies as tech stocks: companies that are competing to produce the most advanced digitised ledger system, or blockchain.”
2 Take the long term view
Quinn sees many folks trading in crypto almost on a day-by-day basis. “I think if someone’s going to buy a high-risk speculative investment like this, I think that they shouldn’t be day trading it cause it’s so volatile,” he said.
“They should take a three-year view, and the long-term gamble here is that [crypto] will become an established medium of exchange. If people are jumping in and out of it, then every time it moves up and down 10pc, they’re going to get badly beaten up.”
3 Consider using a pension vehicle
As a financial advisor, Charalambous invested a small sum in crypto himself in 2017, which he says was as much to educate himself as anything else.
Although he had some successes, overall he says he didn’t make anything like the returns that others have claimed.
“It has been an awful investment up to now, and I regret the decision, even though I did it knowing the risks that I was facing.”
If a client was adamant, however, he would suggest using a pension vehicle, such as a small self-administered pension scheme (SSAP) to invest in something like an exchange-traded fund, but putting in no more than 5pc of your scheme.
“Why should you not get your tax relief, the tax-free growth and take risk,” he said, adding that you’d have to pay capital gains tax on any gains.
Although Charalambous is keen to stress that he’s not in any way recommending or condoning the practice, for him, availing of the tax reliefs through this pension vehicle “made any potential losses, more palpable. I could tolerate them. And also the growth which I was hoping for would not be taxed within.”
4 Don’t forget about the tax
Just like most other investments, you’ll need to pay tax on any significant gains you make.
If you’ve made these gains based on using online trading platforms, the tax you need to worry about is capital gains tax, which is levied on crystallised gains of more than €1,270 in any year at a rate of 33pc.
This means that you only need to worry about it until the time when you go to sell the asset – assuming you’ve made a profit.
If you made a loss, you can offset gains on the sale of any other assets in the same year, or else carry the loss forward to future years until it is wiped out.
Either way, you’ll need to fill in the CG1 capital gains tax form, even if your gains are less than the €1,270 threshold.
5 Shop around for your trading platform
There are a number of established online platforms where you can deal very easily in crypto, but be sure to compare fees and charges carefully as some of them can be very expensive.
While Bitcoin is the household name, there are thousands of cryptocurrencies you can invest in, with the numbers growing all the time.
According to Investopedia, some of the better-known ones include ethereum, shiba, dogecoin, solana, cardano, stellar, binance and tether.
There are lots of dedicated online platforms and brokers – mostly international – through which you can trade directly in any of these cryptocurrencies, but because of the high risk of scams, it’s recommended you choose a reputable, long-established company that is registered with a financial regulator.
Coinbase, for instance, has an office in Dublin and is regulated by the Central Bank as an electronic money institution, while eToro is authorised and regulated by the Cyprus Securities Exchange Commission.
Another firm, Gemini, recently secured an e-money licence from the Central Bank, similar to that which it has with the Financial Conduct Authority in the UK.
There are also brokers, such as DeGiro, which offer investors the opportunity to invest indirectly in cryptocurrencies through vehicles called crypto trackers, using exchange-traded funds and exchange-traded notes.
Some brokers may focus on the most popular cryptocurrencies, such as Bitcoin, while others offer a broader range from the many others available.
Financial advisors who are asked about crypto will often recommend using dedicated platforms rather than something like the Revolut app if you want to do it as cheaply as possible.
In terms of the charges to check out, all platforms will generally charge a fee for each cryptocurrency trade. Coinbase charges 1.49pc for each trade, as does Gemini for transactions of €200 or more, while eToro charges 1pc.
There will usually be charges for buying cryptocurrencies using your credit or debit card – but debit card charges are usually cheaper.
Some exchanges may offer free payment methods like a bank transfer, so these are worth looking out for.
Some platforms may only allow transactions using a particular fiat currency, such as US dollars, so if you’re buying with euro, there may be a conversion fee.
If you’re completely new to these platforms, it may take some time to understand the various charging structures, but it’s well worth doing so.
Some standard platforms may also feel a bit overwhelming or technical to use, but a bit of research should help you find platforms that offer a more user-friendly experience for beginner investors, although these may be more expensive to use.
As always, it’s important to be aware before you sign up that investing in cryptocurrency remains high-risk no matter what way you do it, and you should be prepared to lose all of the money you invest.