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Should You Invest in Bitcoin as a Retirement Investing Option?

As the bitcoin market develops, more possibilities for incorporating bitcoin into retirement plans become accessible.

Despite lingering worries about its high volatility, energy consumption, and fraud risk, Bitcoin has been steadily gaining ground in recent years. With a 164 percent return last year, bitcoin (BTC) – the Bitcoin network's native cryptocurrency - outperformed gold and the S&P 500. Last year, gold increased by 21%, while the S&P 500 index increased by 13%. Bitcoin is the most lucrative asset class of the three, even as the economy recovers from the epidemic. It's up 69.55 percent so far this year, compared to gold's loss of 5.11 percent and the S&P 500's rise of 19.26 percent.

With such a track record, it's no surprise that 40% of young investors have expressed interest in incorporating bitcoin and other cryptocurrencies in their retirement portfolios.

So, what are the advantages, dangers, and choices to consider?

Buying bitcoin as a retirement investment has a number of advantages.

Issuing and supplying

While bitcoin's growth potential is tempered by its volatility, understanding its fundamental characteristics helps to minimize most of that risk in the long run.

Unlike fiat currencies like the US dollar, Bitcoin has a finite quantity of 21 million coins, which implies that once the circulation supply hits that number, no more can be produced. One of the main advantages of bitcoin's future worth is that it is anticipated to rise when the buying power of fiat currencies declines due to inflation.

In addition to having a limited supply, Bitcoin undergoes a "halving" event every 210,000 blocks (about every four years), during which the reward for mining BTC transactions is reduced by half. Bitcoin's inflation rate is reduced as a result, extending its life. While 50% of all bitcoins were mined in four years, the other 50% will take another 120 years. This is a positive thing for long-term investors since it emphasizes the assets' scarcity.

The bitcoin stock-to-flow model is a statistical model that considers the asset's supply (stock) and yearly issuance rate (flow) to forecast future BTC appreciation. Despite the fact that it has been criticized by a number of other traders, the model - developed by pseudonymous trader Plan B – has so far accurately predicted the asset's price.

Perhaps most intriguing is the fact that the Bitcoin stock-to-flow model predicts that BTC might hit $1 million per coin by 2024.

Inflation-proof your portfolio

In recent years, bitcoin has been most closely compared to gold, which has traditionally been seen as a major inflation hedge. Both bitcoin and gold have a finite quantity, but bitcoin has many benefits over gold, including the ability to be transferred immediately, the cost of storage and security, and the ability to be readily split into smaller pieces.

Since its debut in 2010, the price of bitcoin has regularly outpaced gold.

Here's what $1 would be worth in the given year if it were invested.

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 Make a Retirement Investment in Bitcoin

IRA with Bitcoin

A bitcoin Individual Retirement Account (IRA) is one of the most common methods to invest in bitcoin for retirement (IRA). A bitcoin IRA is self-directed, which means that the account holder decides which investments to make. This makes alternative asset classes like real estate, precious metals, and cryptocurrencies more accessible.

Bitcoin IRAs operate similarly to conventional IRAs, except instead of mutual funds, your money is invested in bitcoin.

Similarly to a Roth IRA, you pay taxes on your assets before you remove them, rather than afterwards. This is beneficial for high-return investments, such as bitcoin. Bitcoin IRAs, like conventional IRAs, have annual contribution limitations of approximately $6,000.

A bitcoin IRA is divided into three parts:

  • A custodian is a third-party administrator who oversees the account and ensures that it is compliant with IRS and government laws. Banks serve as the custodian in conventional IRAs.
  • An exchange is a third-party site that handles your cryptocurrency transactions and is where you'll buy bitcoin for your IRA.
  • The bitcoin IRA usually provides a safe storage solution to protect your funds from theft after purchase.

Many self-directed IRA providers provide a "all-in-one" bundle in which the bitcoin IRA provider collaborates with particular crypto exchanges. According to the Retirement Industry Trust Association, although 13% of all Americans exchanged cryptocurrency in the previous year, just 2-5 percent of all IRAs are invested in alternative assets (RITA). In the last year, a slew of bitcoin exchange-traded funds have emerged to satisfy the increasing desire for institutional investors to join the cryptocurrency market.

A bitcoin IRA, on the other hand, usually has higher costs. Setup and account maintenance fees are two examples of these costs. For example, if you utilize Blockmint's popular bitcoin IRA, you'll be charged a 15% transaction cost, 2.5 percent buy transaction fee, 1% sale transaction fee, $195 yearly maintenance fee, and 0.50 percent monthly storage fee on your IRA amount.

Some self-directed IRAs have additional restrictions, such as the inability to trade with your preferred cryptocurrency exchange. Another drawback is that, unlike with a traditional IRA, bitcoin capital losses cannot be used to offset capital gains.

Bitcoin 401(k)

ForUsAll, a small 401(k) provider, has collaborated with cryptocurrency exchange Coinbase to allow its clients to invest up to 5% of their retirement savings in cryptocurrencies such as bitcoin. A 401(k) is a kind of retirement plan that enables employees to contribute a portion of their pre-tax income to a retirement account, which is often matched by their employer. The funds are usually invested in equities, bonds, and mutual funds, but individual investors are increasingly asking for cryptocurrencies to be included to the available assets. The Investment Company Institute estimates that 401(k) plans account for $6.7 trillion of the $34.9 trillion retirement market in the United States.

Self-purchase of bitcoin

There are advantages to purchasing bitcoin straight from an exchange and keeping it long term if you don't want to deal with the bother of setting up a bitcoin retirement account. You won't have to pay intermediary costs, which may add up quickly if you do a lot of business. You'll also be free to contribute as much or as little as you desire, as opposed to the minimum and maximum contributions seen in conventional 401(k) and IRA arrangements. This approach also lends itself to the usage of third-party software from businesses like 3Commas, which automates exchange purchases so you can keep track of your positions more simply. Buying bitcoin on your own, on the other hand, has disadvantages. You'll have to pay more taxes on your earnings than you would with an IRA or 401(k), and you'll be in charge of your investments.

In the end, bitcoin is a volatile asset with more risks than traditional retirement investments. However, investing in it for the long run is a fantastic way to diversify your portfolio, and it has a higher upside potential than other alternative assets. And, despite the fact that the asset is still in its infancy compared to a commodity like gold, it has produced an annual average return of 891 percent (2011-2020.) During the same time span, gold has averaged a 4.08 percent yearly return.

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