Photo: Finance Magnates
It’s no secret that cryptocurrencies are becoming popular: more established companies are starting to accept digital assets as a payment method; some report they say U.S. banks could soon allow their customers to buy, hold and sell Bitcoin via their existing accounts.
In the latest episode of the new normal, financial services firms allow common investors to add virtual currencies such as Bitcoin by launching products marketed as “cryptocurrency individual retirement accounts (IRA)” – crypto IRA – and “Bitcoin IRA”.
THE Crypto IRA they fall within the scope of self-directed IRAs, i.e. pension funds that allow you to invest in alternative assets such as cryptocurrencies, real estate and physical gold.
According to CNBC, an ever-increasing number of investors are banking on the Bitcoin IRA instead of social security.
The onslaught of cryptocurrencies makes investors wonder: Could this growing asset class be the road to retirement?
The short answer is that cryptocurrencies can play a certain role within a general pension plan, but not in the entirety – here’s why.
The role of cryptocurrencies in a pension plan
To understand what cryptocurrencies represent, it is first of all important to understand why you are betting on them.
The reason you are investing for retirement is that at some point you plan to retire and support yourself on a lump sum, higher than you would get if you kept the money in a savings account.
But investing comes with a certain level of risk, and put simply, you can’t afford to risk losing your retirement fund. Most planners and financial advisors will tell you to diversify your investment portfolio to mitigate risk; the old saying “don’t put all your eggs in one basket” doesn’t come from retirement, but it’s still a good general rule.
Most assets usually include stocks, bonds, certificates of deposit and exchange-traded funds, but in the event of a downturn in the economic market the inclusion of digital assets such as cryptocurrencies will be beneficial, as cryptocurrencies have a low correlation. with economic data.
An additional benefit of holding cryptocurrencies in your retirement portfolio are the tax advantages: tax-facilitated IRA crypto accounts relieve the burden of paying additional capital costs arising from capital gains taxes. This way you can save on taxes and benefit from the compound growth of your assets.
In addition to being a risk mitigating factor and having benefits from a tax saving perspective, the most relevant benefit of holding cryptocurrencies in a retirement portfolio is not so much to convert them into dollars after a long period of time, but to use them. in the era of decentralized finance (DeFi).
In the short term, cryptocurrencies are considered a way to make money fast, but the real goal is to completely change financial transactions as we know them: borderless, transparent, accurate and fast. Over time, if DeFi evolves globally, the cryptocurrency could become the world default value system.
Where’s the catch?
Crypto IRAs represent an interesting picture, but there are some quirks.
Unlike traditional IRA accounts, crypto IRAs accumulate commissions: the average crypto IRA, in fact, will have a holding fee, a minimum monthly fee on the account, a fund establishment fee and commissions for the purchase of assets and for transfers of funds; Furthermore, IRA crypto can only be traded during standard market hours, which significantly affects the value of the IRA over the course of a weekend.
In addition, cryptocurrencies are highly volatile – it’s the price they pay for their limited supply and lack of a central bank. If you’re close to retirement, consistency is key, so it might not be wise to put all your funds in one crypto IRA.
To combat volatility, you can consider depositing your cryptocurrency assets into high-yielding accounts such as Hodlnaut: with Hodlnaut you can earn up to 12.73% annual percentage return (APY) on your deposits; interest is compounded and paid weekly. It’s kind of like receiving regular dividends as a form of recurring income.
Here’s how things stand: if you are investing for the long term, you will want to bet on investments with potential but also diversify your portfolio, so as not to be devastated by possible losses; cryptocurrencies can help with this. But if you only rely on cryptocurrencies to get rich when you retire, it’s like playing the lottery.
If you deposit your cryptocurrency assets into profitable crypto accounts such as Hodlnaut, you could invest more confidently in cryptocurrencies as you would see immediate returns that would increase over time; this way you will be able to diversify your cryptocurrency assets and your crypto IRA accounts will not occupy a disproportionate position within your retirement portfolio.