Analysis: Australia’s DIY superannuation fund loses millions on crypto bets, investors aren’t sweating it

SYDNEY, March 2 (Reuters) – Thousands of Australians who used do-it-yourself (DIY) pension funds to bet on cryptocurrencies face hundreds of millions of dollars in losses, putting their savings at risk in a scheme that initially was established to ensure sufficient pension income.

These risky bets are possible as DIY or self-managed superannuation funds (SMFs) fall outside the remit of the supervisory regulator that oversees professionally managed funds, thereby allowing them to invest with fewer restrictions.

Do-it-yourself superannuation funds account for a quarter of Australia’s A$3.4 trillion ($2.29 trillion) superannuation pool. Tens of thousands created such funds over the pandemic, pouring money set aside for retirement into markets, including cryptocurrency. But regulators can do little more than warn of the risks.

Peter (50), who describes himself as a “bitcoiner”, is among those who are content to ignore the warnings.

He moved his A$130,000 nest egg from an Australian superannuation fund to an SMSF and invested it in bitcoin in 2021. At one point his fund was up A$100,000 when bitcoin hit an all-time high, but is now “underwater” after that prices crashed.

However, Peter continues to buy bitcoin.

“My convictions have not changed,” said Peter, who did not give his full name to keep his financial affairs private.

“It doesn’t bother me, honestly. After ten years of this ride, part of me has died inside when it comes to price.”

And Peter is not alone.

According to the Australian Taxation Office, more funds are adding to cryptocurrencies, although they are still a small minority.

CRYPTO ‘WANT TO HELP’

There is approximately US$880 billion in Australia’s SMSFs, with crypto assets accounting for $1.4 billion of that in financial year 2021. The amount of crypto assets is likely to have grown since then.

Regulatory rules require investors to retain assets for retirement, carry out audits and recognize risks, but say nothing about the appropriateness of investments from SMSFs.

It stands in stark contrast to measures in some other countries or even Australia’s oversight of the $2.3 trillion professionally managed superannuation sector, where funds can be barred from taking on new members if they underperform.

The Tax Office does not provide information on portfolio losses. However, bitcoin prices, near $24,000 now, are 16% below the 2021 low and 60% below the 2021 peak.

Assuming an average decline of 40% would mean a nearly A$600m drop in the value of SMSF investments in cryptocurrency, Reuters calculations show.

This estimate was validated by Liam Shorte, a financial planner specializing in SMSFs.

“Most people I deal with came in late,” he says.

But crypto loyalists believe the asset class should be judged over decades, not days.

“If I want an early retirement, this will help,” said Ken, a 47-year-old professional who ventured into cryptocurrency in May 2021 after first checking with his wife.

He bought more than A$100,000 of bitcoin and ether via his SMSF, accounting for 10-20% of the fund.

“If the investment goes pear-shaped, I’ll work an extra year,” said Ken, who also did not want to give his full name.

LITTLE REGULATION

New SMSFs are set to grow by 30% in 2021, a Vanguard and Investment Trends survey shows, with more than half of newbies polled saying they could outperform their pension fund.

“I was getting calls every week at the top,” says Sevan Tuna, managing director at financial adviser Alexander Spencer. “It was ridiculous, people had a lot of time on their hands.”

Australia’s DIY superannuation sector combines size and freedom in a way that sets it apart from other countries.

The US also has a self-reliant pension sector, but its use is negligible.

In the UK, self-managed pension funds cannot invest directly in bitcoin or other cryptocurrencies, according to Victoria Scholar, chief investment officer of Interactive Investor.

Hargreaves Landsdown, among the UK’s biggest stockbrokers, is also shutting its 460,000 self-managed pension clients out of property.

But in Australia, SMSFs can take out loans for houses and farms, buy shares in private companies or collectables such as fine wine and jewellery.

Australian regulators recommended in 2019 that SMSFs be banned from borrowing, and in the same year the Australian Tax Office (ATO) warned 17,700 fund managers that they were not diversified enough.

Where the funds are highly concentrated, investors must demonstrate that they have assessed the risk, the ATO said in a statement.

Treasury, which oversees the ATO, said no changes are planned to SMSF governance.

Regulating investment decisions for SMSFs could have unpopular consequences, Tuna said. Forced diversification can limit large real estate investments. Property and the loans to finance it make up a fifth of all SMSF assets.

John Maroney, who stepped down as head of Australia’s SMSF association this week, said large investments in cryptocurrency were worrying but changing rules would increase costs.

“Our general position is that if it is legal to invest in speculative assets, no further restrictions should apply to SMSF investments.”

($1 = 1.4828 Australian dollars)

Reporting by Lewis Jackson; Editing by Praveen Menon and Himani Sarkar

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