Should You Add Cryptocurrency to Your Retirement Portfolio?

In its most basic form, the purpose of investing funds today is to yield a larger return or capital in the future. This future might encompass significant acquisitions like a vehicle or a property, but it’s primarily geared toward retirement. Investors must contemplate which assets to possess to enhance their probability of fulfilling their financial aspirations.

The investment opportunities have primarily included stocks and bonds. However, a fresh asset class has recently appeared as a potential investment choice. Let’s examine in detail if cryptocurrencies should play a role in your retirement planning.

Tax Advantage

The simplest method to possess bitcoin and other digital currencies is to hold them like any other taxable assets. Consequently, the purchase and sale actions are liable for capital gains taxes. However, you can mitigate the tax consequences of these transactions through a strategy known as tax-diversification or “asset location”. This is possible because self-directed IRAs enable individuals saving for retirement to invest in cryptocurrencies within a tax-deferred account.

This is achieved by coupling self-directed IRAs with a cryptocurrency wallet that functions as a unique account for digital currencies, thereby potentially reducing overall tax liabilities. The decision between a Roth and traditional IRA ultimately depends on whether you’d rather pay taxes presently or in the future.

Savings on Short-term and Long-term Capital Gains Tax

Transactions of stocks, bonds, and mutual funds are liable to short-term and long-term capital gains tax. Cryptocurrency is no exception. Unless you store it in your IRA. Since IRA funds are either tax-free or tax-deferred, individual transactions within your IRA do not necessitate IRS reporting for short or long-term gains. Hence, there’s no requirement to keep track of the cost basis for your individual transactions.

The IRS views cryptocurrency in a similar light to real estate, as indicated in Notice 2014-21, which declared, “virtual currency is to be treated as property for US Federal tax purposes.”

This implies that income generated from selling Bitcoin, Ethereum, or other cryptocurrency investments is liable to short-term taxation or long-term capital gains rates, akin to a property investment. Substantial increases in the value of the investment could lead to taxation by the IRS – unless it’s housed within a Traditional or Roth IRA.

Diversified Portfolio

Past data from Morningstar has illustrated a negligible correlation between bitcoin and the stock market, causing many to label it as the “digital gold.” Traditionally, investors have turned to gold as a diversification strategy for their stock and bond portfolios due to its minimal correlation with both markets. Bitcoin displayed this same trait from 2012 to 2020, prompting many to regard it as a tool for portfolio diversification.

However, it’s worth noting that recent data somewhat undermines the argument of bitcoin as the digital gold. Despite this, investors persist in employing bitcoin as a means of diversification. As other cryptocurrencies are relatively new, substantial research into their diversification capacity is still lacking. If you’re unsure about crypto, you can visit https://learnaboutgold.com/ to learn how you can incorporate other assets like gold in your self-directed IRA. This is a more traditional way of diversifying your retirement portfolio with a proven track record over time.

Access

The most apparent advantage is the opportunity to incorporate cryptocurrency into your retirement investment strategy. This concept is still very novel and is only available through specialized providers. If you’re considering adding cryptocurrency to your retirement portfolio, note that you can only do this via a crypto IRA.

Most 401(k), 403(b), and 457(b) plans limit offerings to standalone mutual funds or target date funds. However, not every IRA is a crypto IRA. The conventional traditional and Roth IRAs provided by many popular online platforms are not yet set up to allow direct investments in cryptocurrency.

Decentralization

Throughout 2022, the actions and policies of the Federal Reserve have been closely monitored by stock market investors. The central bank’s decisions to raise interest rates and implement measures for quantitative tightening highlight how a centralized financial model can potentially negatively impact both investors and consumers. In contrast, cryptocurrencies operate on a different paradigm.

Cryptocurrencies depend heavily on blockchain technology, which is the fundamental structure that facilitates crypto transactions and ensures decentralization. Unlike in a centralized system, there isn’t a governing body in the crypto world that can artificially inflate the supply of cryptocurrency or employ tightening strategies that result in deflation. This feature of decentralization inherent in cryptocurrencies becomes particularly advantageous during periods of financial turbulence.

Potential for Long-Term Growth

Undeniably, the field of cryptocurrency has evolved from being a specialized interest to a significant global financial powerhouse. As industries are restructured by blockchain technology and as it gains approval from institutions, the potential for growth in established cryptocurrencies becomes increasingly evident.

The long-term perspective of a Crypto IRA is in harmony with the philosophy of long-term investing, encouraging you to embark on this journey and observe the global progression of digital assets. While short-term market fluctuations may cause minor waves, the historical rise of major cryptocurrencies suggests the likelihood for sustained growth.

Endnote

Cryptocurrency presents various opportunities for financial gain. Nevertheless, before contemplating an investment in a Bitcoin IRA, it’s crucial to acquire extensive knowledge about the particular self-directed providers and the digital asset you intend to purchase. Additionally, being aware of the market fluctuations of cryptocurrencies such as Bitcoin is key before investing in an Individual Retirement Account (IRA).