Cryptocurrency can be a highly promising asset to consider for your retirement portfolio if you fully understand the benefits and financial risks of investing in Bitcoin for a more diversified portfolio. With its enticing upside, cryptocurrency has gained more than 60% just since the beginning of this year and is up more than 400% over the last 12 months, so it’s worth considering as an alternate plan toward restoring underfunded retirement portfolios.
A question I’m often asked is, “Is there room for Bitcoin in my retirement portfolio?” Well, the answer depends on whether that portfolio already provides close-to-guaranteed support for whatever minimum standard of living you have set for your retirement. Once you’ve done your due diligence, and if your minimum retirement needs have been met, cryptocurrency is certainly something you should consider in your financial portfolio.
Despite its ongoing price volatility, an increasing number of people are turning to Bitcoin as part of their investment portfolio protection for a multitude of reasons:
- It changes the way we transact. Bitcoin provides an ability to make transactions beyond borders, acting as a bridge from one currency to another. Convenience and safety are in the interest of all transactors, with Bitcoin showing an undeniable advantage compared to its rivals.
- It transcends national regulators. Central banks all over the world do not have authority over Bitcoin, which increases Bitcoin’s credibility and transparency.
- It’s considered currency by the IRS. Bitcoin is one example of a convertible, virtual currency. Bitcoin can also be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies. For federal tax purposes, virtual currency is treated as property.
Cryptocurrency 101
For those just getting acquainted with digital cryptocurrencies, a cryptocurrency is a decentralized digital currency in which no central authority can control its transactions. Instead, it is a network of privileged participants who follow an agreed set of rules. The three components of a cryptocurrency are a peer-to-peer (p2p) network, cryptography, and a consensus mechanism.
How does this work? In 2008, Satoshi Nakamoto published a whitepaper suggesting a way of creating a decentralized currency system called Bitcoin. This system would create digital money that solves the double-spending problem without the need for a centralized authority. Bitcoin, the first cryptocurrency and the largest by volume, is a transparent ledger without a central authority.
In the banking system, the bank manages its ledger of balances and transactions. Bitcoin, on the other hand, is a transparent ledger. Therefore, the bitcoin is pseudo-anonymous, meaning everything is open, transparent, and trackable. However, you cannot tell who is sending what to whom.
Does crypto make sense for my retirement portfolio?
As cryptocurrencies continue to advance, develop and gain wider traction, the financial implications of this growth are clear. If you’re going to buy Bitcoin, do it in your IRA or some other tax-sheltered account. (A growing number of these let you own bitcoin). Individual Retirement Accounts (IRA) are tax-advantaged tools that enable people to save for their retirement. Companies have expanded their accounts, with BitcoinIRA making Bitcoins available to its US retirement accounts since 2016.
As with many alternative asset classes, cryptocurrency has many benefits, including:
- Lower transaction costs. Cryptocurrencies aim to make it easier to transfer funds directly between two parties, without the need for a third party like a bank or credit card company. This lowers fees and costs of transactions, making instant transfers much cheaper than anything being offered by banks.
- Safety and reliability. A payment made with cryptocurrency cannot be reversed after the fact and cannot be used for fraud or lead to identity theft – a huge perk.
- Crypto can be more stable. Adding cryptocurrency to a retirement portfolio can circumvent the issue of short-term price volatility. Because the returns are not correlated to any specific industry, investing in cryptocurrency can reduce unsystematic risk.
- Big potential upside. With its increased popularity, Bitcoin has led to many overnight millionaires in the past few years. While irrational investing is certainly not encouraged, holding cryptocurrency could lead to major returns in your retirement portfolio.
- Retirement Planning with Bitcoin: Traditional vs. Roth (IRA)
Generally speaking, there are higher fees when setting up and maintaining a bitcoin IRA compared to other IRAs. Although a special type of IRA needs to be established in order to successfully have crypto included as a part of the assets included in this tool, the same tax-related options exist. A traditional type of IRA, with tax-deductible contributions and withdrawals taxed, or a Roth IRA with no tax breaks on contributions but tax-free distributions, are both options on the table. Specific to the bitcoin space, if investors believe that the price per coin will continue to increase over time, this should be taken into account.
Furthermore, investment minimums connected to these bitcoin IRAs can be higher when compared to other IRAs. When these two factors are taken into account, the cost of a bitcoin IRA might be significantly higher than initially thought. Start by buying, say, $1,000 worth of bitcoin (or $100, or $100,000, or whatever aligns with your budget). If it rises, and you start to show a profit, buy a bit more. Each time it rises, and your profit grows. As always, it’s important to work with a reputable and experienced self-directed IRA administrator to first get your account opened and funded properly.
Betting On Bitcoin For Retirement
In conclusion, a recent poll conducted by deVere Group of clients over the age of 55 found that “70% of those surveyed are already invested in digital currencies or are planning to do so this year.” So, many retirees and near-retirees have already invested in Bitcoin.
As the bitcoin and crypto sector continues to mature and become more widely purchased by individuals and institutions alike, it’s important to do your due diligence about any cryptocurrency you wish to include in your retirement account. While investments in digital currencies have the potential to be lucrative, even a familiar concept like an IRA can be more complicated that might otherwise be expected. As always, investing decisions will always carry risk, especially when innovative financial tools such as bitcoin are brought into the conversation. The bottom line: cryptocurrency can be a valuable investment, if it fits within the overall goals and profile of your complete financial portfolio.
