September 06, 2021 |James Messi
In recent times, cryptocurrency appears to be a favorable alternative asset among investors. Despite having the reputation to be riskier, compared with other assets because of its volatility and its potential to be hacked, the crypto industry continues to mature. The debates around cryptocurrency in the United States’ massive infrastructure bill has also been taken as a sign of its maturity. Despite facing a lot of challenges, China’s crackdown of Bitcoin mining being one, it appeared to finally find a permanent space in the financial spectrum.
Just last year, Bitcoin has outperformed the safe-haven asset gold and the S&P 500. It gained a sharp increase of 164%, while gold and the S&P 500 recorded gains of 21% and 13%, respectively. While almost every sector struggled to bounce back in a pandemic-hit economy, Bitcoin seemed to be unbothered, even leading the gains among any other assets. Currently, it is already up a whopping 69.55%, while gold tries to recover from a 5.11% loss, and S&P 500 only achieving a 19.26% rise.
With its latest signs of progress, many individuals are starting to consider cryptocurrency, especially the most popular among all of them Bitcoin, in their retirement plans. What are the other factors that make Bitcoin beneficial for retirement?
Behind Volatility Risk
You probably already know how risky Bitcoin is, but its volatility actually balances its growth and the risk diminishes in the long run. One of the good things about Bitcoin is its potential to increase in value once the purchasing power of fiat currencies diminishes as a result of inflation. This happens due to its fixed supply of 21 million coins. Once that figure is reached, no more additional coins can be created, this is different from fiat currencies like the U.S. dollar.
Aside from having a fixed supply, Bitcoin also has this concept called “halving.” With this, the incentives from mining BTC transactions are cut in half everytime that 210,000 blocks have been mined. This happens around every four years. For long-term investors, the 120 years it will take for the rest of the Bitcoin to be mined should be good news.
The Bitcoin stock-to-flow model, a statistical model used in predicting the future BTC valuation, showed that the cryptocurrency has the potential to reach as high as $1 million per coin in the coming years.
Gold has been considered to be a prominent hedge against inflation, and the asset from which Bitcoin has been compared to the most. While both have limited supply, Bitcoin holds some advantages when it comes to how easily it can be transported and how it is more cost effective to store and secure it. In addition, Bitcoin can be easily divided into smaller units but harder to counterfeit than gold. And as mentioned, it has continuously prevailed over gold with its gains.
For more comparison, based on the Bitcoin price chart, if you invested a dollar in Bitcoin and gold in 2010, it would be worth $776,397.69 in BTC, while $1.56 in gold.
If you’re considering investing in Bitcoin for your retirement, here’s how you can do it.
Bitcoin Individual Retirement Account (IRA)
Launched in May 2016, investors can benefit from the tax advantages of any other Individual Retirement Account (IRA) through Bitcoin IRAs, while also reaping the benefits of a high-risk, high-reward alternative asset class. It is one of the prominent methods in investing in Bitcoin for retirement and more favorable than an employer-sponsored 401(k) or a Roth IRA since vehicles like these do not allow an alternative asset like gold or cryptocurrency. Through this, investors can choose from a variety of investments, including real estate, precious metals, and cryptocurrencies. Bitcoin IRAs work similarly to typical IRAs but instead of mutual funds, your money is invested in cryptocurrency.
Similar to paying taxes in a Roth IRA, its payment is done immediately on the assets you hold rather than when you withdraw them. This is favorable for high-return investments, which Bitcoin has proven to be. Bitcoin IRAs have annual contribution restrictions that are similar to standard IRAs which are usually approximately $6,000.
A Bitcoin IRA is made up of three parts: a custodian, an exchange, and a secure storage. A custodian is a third-party administrator who oversees the account and ensures that it complies with Internal Revenue Service and government requirements. A bank serves as the custodian in a regular IRA. Meanwhile, an exchange is a third-party site that handles your cryptocurrency trades and where you can get your Bitcoin for your IRA. A secure storage service, which is often supplied by the Bitcoin IRA, safeguards your assets from theft after they have been purchased.
Bitcoin IRA company collaborates with cryptocurrency exchanges through an all-in-one package offered by self-directed IRA providers. However, according to the Retirement Industry Trust Association (RITA), only 2-5 percent of all IRAs are invested in alternative assets, despite the fact that 13 percent of all Americans exchanged crypto in the previous year. Also, due to a growing demand from institutional investors enticed with trying their hands in the crypto world, many Bitcoin exchange-traded funds have been introduced over the past years.
On the downside, you may incur a lot of fees while adding Bitcoin. There are also a lot of limitations with self-directed IRAs, including a possible inability to trade with your preferred crypto exchange. In addition, unlike a traditional IRA, capital losses from Bitcoin cannot be used to offset capital gains.
If setting up a Bitcoin retirement account is a lot of work for you, you can have an option to buy Bitcoin yourself. You can purchase it on an exchange and hold it for a long time. By doing this, you never have to pay for middleman fees that can be very expensive when doing numerous transactions. In addition, avoidance of minimum and maximum contributions needed in traditional 401(k) and IRA setups is possible. You can also easily manage your positions through third-party software that automates exchange purchases. But, of course, there is a catch. Buying Bitcoin yourself would make you pay for higher taxes on your earnings and you are solely responsible for your own investment’s security.
While cryptocurrencies like Bitcoin are riskier than any other assets that individuals normally invest in for retirement, it is still considered as a good option in diversifying one’s portfolio.