Should You Invest In Bitcoin For Your Retirement?
As the bitcoin market matures, an increasing number of options are available to add digital currency to pension plans.
Bitcoin has steadily gained ground in recent years, despite lingering concerns about its high volatility, energy consumption, and the risk of fraud. Last year, bitcoin (BTC) – the native cryptocurrency of the Bitcoin network – beat gold and the S&P 500 with a 164% return. Gold, by comparison, rose 21% last year and the S&P 500 index gained 13%. Even with the current rebound in the post-pandemic economy, bitcoin continues to dominate the pack as the most profitable asset class of the three. So far this year it is up 69.55%, compared to a loss of 5.11% for gold and a gain of 19.26% for the S&P 500.
With this performance, it’s no surprise that 40% of young investors recently said they wanted to include bitcoin and other cryptocurrencies in their retirement plans.
Related: Bitcoin fights resistance; Support nearly $ 48,000
So what are the benefits, risks and available options to know about?
Benefits of buying bitcoin for retirement
Supply and delivery
While bitcoin’s growth potential is balanced by its volatility, much of that risk is mitigated over the long term when you understand its intrinsic properties.
Bitcoin has a fixed supply of 21 million coins, which means that unlike fiat currencies like the US dollar, no more can be created once the circulating supply reaches this number. This is one of the main benefits of bitcoin’s projected value over time, which is expected to increase as the purchasing power of fiat currencies declines due to inflation.
In addition to having a fixed supply, Bitcoin goes through what is called a “halving” event every 210,000 blocks (roughly every four years) where the reward for mining BTC transactions is halved. This lowers the inflation rate of bitcoin, improving its longevity. While it took four years to mine 50% of all bitcoin, it will take another 120 years to mine the remaining 50%. For long-term investors, this is a good thing, as it accentuates the limited supply of assets.
Related: The 3 Reasons Why Bitcoin’s Rise May Slow Down
A statistical model known as the bitcoin stock-flow model takes into consideration the asset’s supply (stock) and its annual issue rate (flow) and uses this data to predict the future appreciation of BTC. Despite criticism from a number of other traders, the model – created by a pseudonymous trader Plan B – has predicted the price of the asset so far.
What is perhaps most interesting is that Bitcoin’s stock-flow model suggests that BTC could reach $ 1 million per piece by 2024.
Hedge against inflation
The asset that bitcoin has been compared with the most in recent years is gold, historically viewed as a leading hedge against inflation. Bitcoin and gold both have a scarce and limited supply, but the advantages of bitcoin over gold include the fact that BTC can be transported instantly, is much cheaper to store and secure, and that it is easily divided into smaller units and impossible to counterfeit.
The price of Bitcoin has also consistently outperformed gold since its inception in 2010.
Here’s how much $ 1 would be worth if it were invested in the given year.
2020 BTC: $ 3.78 | Gold: $ 0.93
2019 BTC: $ 4.38 | Gold: $ 1.28
2018 BTC: $ 5.14 | Gold: $ 1.49
2017 BTC: $ 15.39 | Gold: $ 1.44
2016 BTC: $ 64.24 | Gold: $ 1.36
2015 BTC: $ 146.02 | Gold: $ 1.68
2014 BTC: $ 74.70 | Gold: $ 1.41
2013 BTC: $ 434.83 | Gold: $ 1.38
2012 BTC: $ 4,631.80 | Gold: $ 1.13
2011 BTC: $ 3,109.53 | Gold: $ 1.12
2010 BTC: $ 776,397.69 | Gold: $ 1.56
How to invest in bitcoin for retirement
One of the main ways to invest in bitcoin for retirement is through a bitcoin individual retirement account (IRA). A bitcoin IRA is self-directed, which means the account owner chooses which investments they want to make. This opens the door to investing in alternative asset classes like real estate, precious metals, and cryptocurrency.
Bitcoin IRAs work much like traditional ones, except your money goes into cryptocurrency instead of mutual funds.
As with a Roth IRA, you pay taxes up front on the assets you hold instead of withdrawing them. This is advantageous for investments that generate high returns, as bitcoin tends to do. Bitcoin IRAs also have annual contribution limits similar to traditional limits – typically around $ 6,000.
There are three parts to a bitcoin IRA:
- A Guardian is a third party that manages the account and ensures that it complies with the Internal Revenue Service and government regulations. In a traditional IRA, the banks play the role of custodian.
- a to exchange is a third-party platform that manages your crypto transactions and where you will buy bitcoin for your IRA.
- A secure storage The service protects your assets from theft after purchase and is typically provided by Bitcoin IRA.
Many self-managed IRA providers include an “all-in-one” package, in which the Bitcoin IRA company partners with specific crypto exchanges. While 13% of all Americans have traded cryptos in the past year, only 2-5% of all IRAs are invested in alternative assets, according to the Retirement Industry Trust Association (RITA). A range of bitcoin exchange-traded funds have also emerged over the past year to meet growing demand from institutional investors entering the crypto market.
It should be noted, however, that there are generally more fees involved with a bitcoin IRA. These include setup fees and account management fees. If you use Blockmint’s popular bitcoin IRA, for example, you will be hit with a 15% transaction fee, 2.5% buy transaction fee, 1% sell transaction fee, fees. annual maintenance fee of $ 195 and a 0.50% monthly storage fee assessed on your IRA. balance.
Some self-directed IRAs also come with more limitations and you may not be allowed to trade with the crypto exchange of your choice. Another downside is that bitcoin’s capital losses cannot be deducted to offset capital gains like they would with a typical IRA.
Bitcoin 401 (k)
A small 401 (k) provider called ForUsAll has partnered with crypto exchange Coinbase to give its customers the option of investing up to 5% of their retirement funds in a cryptocurrency like bitcoin. A 401 (k) is an account that allows an employee to dedicate a percentage of their pre-tax salary to a retirement account, often matched by their employer. Funds are typically invested in stocks, bonds, and mutual funds, but demand is increasing from retail investors to add cryptocurrency as an available asset. According to the Investment Company Institute, one-fifth of the $ 34.9 trillion U.S. retirement market is made up of 401 (k) plans, worth $ 6.7 trillion.
Buy bitcoin yourself
If you want to avoid the hassle of setting up a bitcoin retirement account, there are benefits to buying bitcoin directly from an exchange and holding it yourself for the long term. You will avoid having to pay intermediary fees, which can become expensive if you plan to do a lot of transactions. You’ll also be able to contribute as much or as little as you want, avoiding the minimum and maximum contributions found in traditional 401 (k) and IRA setups. This method also lends itself to the use of third-party software from companies like 3Commas, which automates exchange purchases so that you can more easily control your positions. There are, however, downsides to buying bitcoin yourself. These include the fact that you will have to pay more tax on your returns than with an IRA or 401 (k), and you will be responsible for securing your investments.
Ultimately, bitcoin is a volatile asset with more inherent risk than the assets you would typically invest in for retirement. But investing for the long term is a great way to diversify your portfolio, and with more potential than other alternative assets. And although the asset is still in its infancy compared to a commodity like gold, it has generated an average annual return of 891% (2011-2020). Gold, over the same period, generated an average annual return of 4.08%.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.