21 May, 2021
Multiply's view on crypto
"Should I invest in crypto?"
"Can I use my crypto gains as a deposit for a home?"
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit.
Cryptocurrencies are a relatively new phenomenon, but there are now over 5,000 with more appearing every day. Bitcoin is the most well known.
Here’s our guide to the key facts you need to know.
Are they legal?
Are they taxable?
In the UK, cryptocurrencies are not eligible to be held in tax-free wrappers such as ISAs, so you may have to pay tax. Crypto doesn't pay an interest rate or any dividends, so it isn't subject to income tax. However, any gains generated from crypto may be subject to capital gains tax.
For tax purposes, UK residents are eligible for a Capital Gains Tax allowance, which means in the 2021/2022 tax year an individual can make gains (from all sources) of up to £12,300 before any tax is payable. Losses can be offset, but any excess gains are taxed at the rates applicable to your marginal rate. This means gains in excess of the allowance will be taxed at 20% if you are a higher or additional rate taxpayer or 10% for non or basic rate taxpayers.
The value of any crypto on the date of an individual’s death also forms part of their estate for inheritance tax purposes.
Our view on crypto for homebuying
Let’s cut to the chase - we do not recommend you use crypto as a means of saving for a house deposit. This is due to the usual short-term nature of homebuying and the high volatility attached to crypto.
Cash-based savings are usually the most appropriate for your homebuying fund. In particular, we recommend using a Lifetime ISA if you're eligible, to take advantage of the 25% government bonus.
If you have cryptocurrency already invested and plan to use it for a home deposit, make sure you cash out into your bank account before starting the mortgage application process. That way, the lender can see that your deposit funds are in a secure, non-volatile location.
A lender is likely to want to see your source of funds for anti-money laundering reasons.Make sure you keep an audit trail of your crypto trades to prove how you made the money and show your gains are not ill-gotten.
Our view on crypto investing
It’s certainly not for everyone. If you do invest in crypto, it should only be part of a larger and more diversified portfolio.
It’s only suitable for certain goals. If you'll need a certain amount of money at a certain time (especially if it's a shorter term goal) the volatility of cryptocurrencies means they may be a poor investment choice.
Before investing, it is important to understand your attitude to risk (the risk you are prepared to take) and your capacity for loss (the risk you can afford to take).
If you can only afford a loss of 20%, for example, investing in cryptocurrency is not right for you. You must be aware you can lose your entire investment.
Investing is a personal decision for everyone and you shouldn’t invest just because your friends are or you've seen posts or comments on social media.
If you do decide to invest, make sure you do your research. We can’t tell you what the best cryptocurrency is for you to buy and there is lots to learn if you do want to get involved. All of the cryptocurrencies have their own aims and goals which you should ideally understand before buying.
Let’s explore the risks in more detail.
At 10am on 17th May 2021, Bitcoin, which is often seen as one of the more stable cryptocurrencies, was down 27.62% over the last month, but up 302% over the last year.
This demonstrates the volatility of cryptocurrencies and highlights why they are not appropriate for short-term investing where you may need to access the money at a particular time.
Let’s think about saving for a home deposit as an example. If you were looking to buy a home in a year’s time, a massive drop in the value of your investment could leave you without enough.
How much you can afford to lose
No matter your attitude to risk, we would not recommend investing money that you cannot afford to lose. These are very risky investments and you could lose everything you invest.
That's why, if you do invest, you should have a diversified portfolio of investments and only invest a small portion of this via crypto assets.
This is an unregulated market which leads to lots of scams and unscrupulous business practices. UK financial regulator the Financial Conduct Authority (FCA) has stated: “there is growing evidence that crypto assets are causing harm to consumers and markets''.
In January 2021, the FCA banned cryptocurrency derivatives and exchange-traded notes being sold to retail investors as they are concerned about consumers being able to understand the real value of these investments.
In the UK, most FCA regulated investment products receive protection via the Financial Services Compensation Scheme which would mean that some or all of your investment is protected if the provider goes out of business.
As cryptocurrency is unregulated, you would not receive such protection with these assets.
Other factors to consider
There are environmental concerns around cryptocurrencies. The electricity needed for mining, which is the process by which new Bitcoin are entered into circulation, exceeds that of many countries. It is estimated that the carbon footprint of mining for Bitcoin matches that of Argentina.
Adviser Top Picks
- Understand it is a very high risk investment strategy
- Only invest a small proportion of your savings into crypto
- It is rarely suitable for short term goals
- If you plan to use crypto gains for your deposit, cash out before applying for a mortgage
- Don't be surprised if lenders get nervous about crypto as a source of deposit funds