Aspiring crypto millionaire? You're not alone: Editor's Views
Remember that guy in Florida who struck a deal in 2010 to pay for two pizzas with Bitcoin? A decade later, Bitcoin is a household name and everyone wants a slice.
Digital finance broker Savvy pushed out new research* last month showing that 40% of Australians are likely to buy cryptocurrency in 2021. I'll admit I was rather sceptical. The ASX's 2021 investor survey showed just 4% of 'wealth accumulators' intended to invest in the category 'other' - which presumably includes crypto - over the next 12 months.
But then a presenter on one of my favourite morning podcasts said his son was pestering him about investing in Bitcoin. And in the same week, my partner was asked by a friend what he knew about buying crypto and which crypto gurus to follow online. "It feels like now is the time to get in," she said, adding that three of her friends were also actively considering investing. It seems these conversations are permeating through society. Maybe I don't mix with the right crowd.
I made my position clear in May's editorial. Are people making money? Sure, some of them, on paper, lots of it. But others are losing it, rapidly. Don't buy anything you don't understand. If you are taking a punt on "the new gold" or "the currency of the future", ensure it’s part of a total portfolio approach. Rather than betting your life savings on it, carve out a small fraction of your investable wealth for crypto. Research your broker and understand the fees and the Ts&Cs.
Constant extreme whiplash is not part and parcel of investing. Crypto’s popularity with momentum investors and speculative buyers makes it prone to pricing bubbles that will eventually burst. But there are other ways to build wealth where the range of possibilities is much narrower. Amy Arnott's article Does your portfolio need Bitcoin? remains one of the most sensible pieces I've read on the subject. Firstlinks also houses several insightful musings from a variety of perspectives.
While we're on the topic, it could soon become easier to buy crypto via traditional exchanges. On Wednesday, the industry regulator (ASIC) released a consultation paper on crypto-asset based exchange traded products (ETPs), setting out proposed best practices for operators and issuers and seeking feedback. It comes as rival managers BetaShares and VanEck jockey to launch the first ASX-listed Bitcoin ETF. Representatives from both companies have said ETFs are a superior vehicle for investing in the asset class (then again, they would), getting people off unlicensed global exchanges and onto the ASX. Popular Bitcoin trading platform Binance was recently banned from operating in the UK.
A host of ETF sponsors have asked the US Securities and Exchange Commission for approval to launch cryptocurrency ETFs including New York-headquartered VanEck. In Canada, where these products are trading, one crypto-ETF has amassed over $500 million in net assets, growing sharply in the first few days of trading. Details about proposed local products are scant, with both managers remaining tight-lipped.
MORE ON THIS TOPIC: Are crypto ETFs coming?
So, what does ASIC have to say on the matter? The regulator is aware of demand for domestic crypto-ETFs. However, they say there is a "real risk of harm to consumers and markets" if these products "are not developed and operated properly". They're focused on how to price crypto assets, how to classify crypto assets, and how to issue crypto assets that comply with regulations. Some of their proposals include identifying crypto assets that are appropriate for ETPs and the basis for a pricing mechanism. All in all, it sounds like they're open to allowing crypto funds on exchanges under the right circumstances. Of course, it will also be up to the exchanges (ASX, Chi-X) to decide which product they admit.
I have a few lingering questions. There are hundreds of different crypto assets globally. Will I be able to buy an ETF that has exposure to many digital currencies for diversification or just one? How will ASIC decide which assets are "legit"? Crypto trades 24/7, weekends and public holidays, but ETFs listed in Australia will only trade when the market is open (presumably). What does that mean for pricing? And how will ASIC classify these ETPs so investors are protected?
It is clear that interest is growing from investors and asset managers. This interest will contribute to the impression that crypto is a legitimate asset class and not a 'collectable', 'gimmick' or 'Ponzi scheme'.
Not financial advice
Finfluencers and industry experts delivered hours of useful entry-level information, largely about the benefits of ETFs and diversification, which is exactly what new investors need. This was however bookended by micro and small cap company sessions. This gave the distinct impression that new investors should be investing in small companies.
There's nothing "bad" about small and micro-cap companies in the right context. It's a question of risk. Micro and small caps are the most under-researched segments of the market. The stocks are too small, new or speculative to be on the radar of most researchers or ESG analysts. Early stage micro caps with immature business models can be cash hungry and reliant on regular capital raisings to fund growth. Such understanding and risks cannot be addressed in five minutes of spin.
Retail investors need more opportunities to learn in interesting forums, but I wish a more diverse range of opinions was on offer.
Tax time begins
Hey guys, happy tax time! Another financial year has passed and if you're one of the many Australians who started investing and earnings income of capital gains in the share market recently, you'll need to declare this on your tax return.
ETFs and managed funds also pass on distributions throughout the year from realised capital gains and you may be liable for tax on those earnings, even if you have not sold the investment yourself. The distributions have produced some volatile trading days for some ETFs on their ex-distribution days. For example, the ETFS FANG+ ETF (ASX: FANG), a highly concentrated fund tracking a basket of mega-cap US shares, fell 10 per cent on Wednesday (even as stocks in its portfolio gained). More on this next week.
A picture says a thousand words, so enjoy this 9,000-word love letter to the financial year just gone from Lewis Jackson.
Peter Warnes also looks back the 'best ever' year in the week's Your Money Weekly ($) but reminds us that there's still no normal economic in sight – and debt remains persistently high for owner-occupiers.
In Firstlinks, Graham Hand takes on the Treasury’s mammoth fifth Intergenerational Report - a snapshot of Australia in 40 years. The document should guide major policy decisions for years to come so it's well worth a read.
Morningstar analysts have released their Australia and New Zealand Best Stock Ideas ($) for July 2021. Two names have been added and two removed. Meanwhile, equity analyst Brian Han demonstrates his ability to write a good headline, covering Telstra's deal to sell almost half of its mobile towers.
If the week couldn't get busy enough, the ASX welcomed its biggest IPO since 2019 in Pexa Group (ASX: PXA). It was a wobbly start for the property settlements platform, dropping as much as 4.3% at the open. Shares have recovered to $17.60 from a listing price of $17.13. Link (ASX: LNK) retains a near 43% stake in the company. Could this be a better way to gain exposure? Morningstar's Gareth James thinks so.
As Sydney enters its second weekend in lockdown, I've once again become editor by day, sourdough baker by night. Lockdowns affect everyone differently but for me, I think it's a good time to take stock, remember what's important and find solace in a new pastime. Before you know it, life will get back to normal. Stay connected, stay safe.
More from Morningstar:
*The survey polled the attitudes of 1,000 Australians towards crypto.