NAVIGATING THE CRYPTO LANDSCAPE: HOLDING, STAKING AND TRADING

Navigating the crypto landscape: Holding, staking and trading; it can appear quite daunting! Cryptocurrency has taken the financial world by storm, offering innovative ways to invest, earn passive income, and trade digital assets. In New Zealand, as elsewhere, navigating the world of crypto can be both thrilling and daunting. Thus, in this comprehensive guide, we’ll explore the various strategies of holding, staking, and trading crypto assets, delving into their pros and cons. Additionally, we’ll shed light on the tax implications outlined by the Inland Revenue, aiming to provide clarity for Kiwi investors in the crypto sphere.

Holding Crypto: HODLing for the Long Haul

HODLing, a term originating from a misspelled word “hold,” has become synonymous with the strategy of long-term holding in the crypto community. Here are the key pros and cons:

Pros:

1. Potential for Long-Term Growth: Historically, cryptocurrencies like Bitcoin and Ethereum have shown significant appreciation over time, making them attractive assets for long-term investment.
2. Reduced Trading Risks: By holding onto your crypto assets, you mitigate the risks associated with short-term price fluctuations and market volatility.
3. Simplicity: Holding crypto requires minimal effort compared to actively trading or staking, making it suitable for investors seeking a hands-off approach.

Cons:

1. Opportunity Cost: While holding can be lucrative in the long run, it may not offer immediate returns or passive income streams compared to staking.
2. Vulnerability to Market Swings: Sharp downturns in the crypto market can lead to significant paper losses for long-term holders, testing their patience and conviction.
3. Limited Utility: Unlike staking, where assets are actively used to validate transactions and secure the network, holding crypto primarily relies on price appreciation for profitability.

Staking Crypto: Unlocking Passive Income Potential

Staking involves actively participating in a blockchain network by locking up your crypto assets to support network operations. Let’s explore some pros and cons:

Pros:

1. Passive Income: Staking allows investors to earn rewards or interest in the form of additional crypto tokens for contributing to the network’s security and consensus mechanism.
2. Network Participation: By staking your assets, you become an active participant in the blockchain ecosystem, contributing to its decentralization and security.
3. Diversification: Staking provides an alternative source of income beyond traditional investment vehicles like stocks or bonds, potentially enhancing portfolio diversification.

Cons:

1. Lock-Up Periods: Staked assets are typically locked for a certain period, limiting liquidity and flexibility compared to actively traded assets.
2. Technical Complexity: Setting up and maintaining a staking node requires technical expertise and ongoing maintenance, which may deter less tech-savvy investors.
3. Risk of Slashing: Validators or stakers risk losing a portion of their staked assets in case of network protocol violations or malicious behavior, highlighting the importance of due diligence and risk management.

Note that not all apps or platforms allow staking. Some might allow it for one coin but not another. It pays to shop around.  Be aware also that your favourite app or staking platform might change its terms. Then you have to find a new way to stake. You will likely have to move your crypto to another platform in this scenario. That means a cost: the transfer cost. Weigh up the cost of the transfer vs the possible staking gains.

Trading Crypto: Navigating Market Volatility

Crypto trading involves buying and selling digital assets on various exchanges to capitalize on short-term price movements. Here are its pros and cons:

Pros:

1. Profit Potential: Trading offers the opportunity to profit from both upward and downward price movements, leveraging strategies such as day trading, swing trading, or arbitrage.
2. Liquidity: Cryptocurrency markets operate 24/7, providing ample liquidity and trading opportunities for investors seeking to enter or exit positions at any time.
3. Market Access: Trading platforms and exchanges offer access to a wide range of crypto assets, allowing investors to diversify their portfolios and explore emerging trends and opportunities.

Cons:

1. High Risk: Crypto trading is inherently speculative and carries significant risks due to price volatility, market manipulation, and regulatory uncertainty.
2. Emotional Stress: Constant monitoring of price movements and making quick decisions can lead to emotional stress and decision fatigue, affecting traders’ mental well-being.
3. Tax Implications: Trading crypto assets will trigger capital gains taxes on profitable trades. However, it also allows you to claim trading losses against income from crypto trading.

Tax Implications and Regulatory Guidance in New Zealand

The Inland Revenue Department (IRD) of New Zealand provides guidance on the tax treatment of crypto assets, aiming to clarify the tax obligations for investors and traders. According to IRD’s guidance:

1. Holding vs. Trading: No matter what you choose, IRD say that the gain on sale of crypto assets is taxable income, even if you stake. However, if you are a trader (and not solely a holder), then losses incurred from trading can be claimed against income from crypto trading. This is similar to the treatment of losses from share trading.

2. Holding vs. Staking: Investors should be aware that staking involves actively participating in network operations, potentially generating taxable income in the form of staking rewards or interest. However, the tax treatment may vary depending on individual circumstances and the nature of staking activities. Staking doesn’t change the tax treatment of the underlying asset on disposal.

For more detail on the various changes of state that affect crypto assets and their tax treatment, see this article. Note that you can be both a holder and a trader. However it would be best to do so in separate entities. Note also the fraud warnings the IRD have issued.

Conclusion

In the dynamic world of cryptocurrency, investors have various strategies to consider, from long-term holding to active trading and staking. Each approach comes with its own set of pros and cons, as you can see. These are influenced by factors such as risk tolerance, investment objectives, and regulatory considerations. By understanding the nuances of holding, staking, and trading crypto assets, investors in New Zealand can make informed decisions and navigate the crypto landscape with confidence.

As always, we recommend that you seek external expert advice: talk to an experienced financial advisor, one who has a good working knowledge of crypto. And of course, make sure you talk to us!

References

1. Inland Revenue Department (IRD) of New Zealand – Guidance on Crypto Assets

2. “HODLing” – The Origins of a Crypto Slang Term

3. Understanding Staking in Cryptocurrency

4. Crypto Trading Strategies for Beginners

5. Capital Gains Tax (CGT) in New Zealand