Case in point, retirement juggernaut Fidelity.
Fidelity launched a plan in April 2022 that could let workers invest up to 20% of their 401(k) contributions directly in bitcoins — directly from the account’s main menu. Fidelity says it is the first in the industry to allow such investments without a separate brokerage account. And one employer has already agreed to offer the service later this year.
Previously, if you wanted to invest in crypto for your retirement, you would have to turn to options like a Bitcoin IRA. Basically, it’s a self-directed IRA, but you invest in cryptocurrency instead of mutual funds. You could also use crypto to sponsor a 401(k) through the partnership between ForUsAll and Coinbase.
A self-employed person can set up their own retirement plan via a solo 401(k) or SEP IRA, which can include bitcoin investments.
But, the plunge that Fidelity is taking could be a game-changer. And, to be fair, it’s easy to see why.
Crypto for Retirement is Becoming More Popular
Last year, as the market surpassed $3 trillion in value, many cryptocurrencies soared, enticing a growing number of retirees to invest in cryptocurrencies.
In addition, a survey published by Capitalize revealed that 20% of American employees nearing retirement are presently investing in the form of digital assets. “On the other hand, a more sizable 63% of Generation X and Baby Boomers feel that investing in digital assets such as crypto, among others, could result in major losses,” explains Pierre Raymond in a previous Due article.
However, the situation is somewhat different for younger workers than those in these two groups.
“The same survey indicates that around 56% of Gen Z workers already include some form of crypto in their retirement strategy, while 54% of Millennials are doing the same,” adds Pierre. However, older workers are less optimistic about digital coins and crypto.
The Pros and Cons of Investing in Crypto for Retirement
Why are younger investors all in on crypto for their retirement?
Well, there’s potential for higher returns. It can also help protect your retirement balance through diversification. In addition, by investing in a tax-advantaged account, like a Roth IRA or traditional IRA, you don’t have to worry about taxes if the securities and money remain in the account.
However, crypto is still a gamble. So, here are some ways to protect your retirement savings from volatile crypto digital investments.
On the flip side, there are some valid concerns regarding crypto, particularly regarding your retirement. For example, the following concerns have forced the Department of Labor to issue a compliance assistance release for plan fiduciaries focused on 401(k) plan investments in cryptocurrencies.
- Valuation concerns. Cryptocurrencies are valued differently by financial experts. Due to cryptocurrencies not being subjected to the same reporting and data integrity requirements as traditional investment products, these concerns are compounded. Inflating crypto-currencies prices with false information allows scammers to sell their own holdings to make a profit before the value of the currency drops.
- Prices can change quickly and dramatically. In the past, cryptocurrency prices have fluctuated dramatically.
- Obstacles to making informed decisions. Plan participants with little appreciation of the risks involved can easily invest in these investments with expectations of high returns. For example, when 401(k) plan fiduciaries offer cryptocurrency options, they indicate to plan participants knowledgeable investment experts have approved them. Unfortunately, this is not necessarily true, and unfortunately, this can cause significant losses for plan participants.
- Evolving regulatory landscape. Legal rules and regulations are rapidly changing.
Protecting Retirement Savings from Volatile Crypto Digital Investments
The good news? It’s still possible to jump on board the crypto bandwagon without jeopardizing your retirement savings.
Don’t invest more than you can afford to lose.
Cryptos are extremely volatile investments, something that can’t be overemphasized. Be prepared to see their value rise or fall extremely dramatically. What’s more, they’ve often fluctuated by double-digit percentages within just a few hours.
Past performance, unlike stable investments, isn’t always indicative of future results when it comes to risky investments. And cryptos are no exception.
Here’s the bottom line; don’t lose more than you can afford to lose.
Do your research.
Not surprisingly, cryptocurrency exchanges have been the target of damaging hacking attacks and scams. As such, it’s advisable to choose an exchange that has strong security features and low fees, and easy use. Also, find out what users are saying about the exchange before deciding to transact.
The whitepaper of the crypto should also be read. This document, which is standard for every new currency, allows you to understand the cryptocurrency’s use cases and its scalability, and future plans. In addition to your own research, you might benefit from joining a cryptocurrency forum online. Finally, researching a crypto’s reputation and track record may also yield useful information.
Keep your crypto portfolio diversified.
In general, it doesn’t make sense to put all your eggs in one basket when it comes to risky investments — or your retirement portfolio as well. In the case of cryptocurrency investment, it’s especially vital to diversify your crypto portfolio in the following ways, according to Paulina Likos over at U.S. News;
Buy cryptocurrencies with different use cases.
Investing in cryptocurrency with varying uses can help diversify your crypto holdings. As a means of exchange, cryptocurrencies are used for goods and services transactions, but that’s not all they do.
In addition to being a store of value, Bitcoin can be used in preserving and growing wealth since investors have seen outsized returns from it. However, Ethereum, the second-largest crypto network, allows digital programs to be created with its smart contracts.
In addition to stablecoins, crypto investors can also invest in underlying assets such as fiat currency. For example, the crypto market is less volatile due to stablecoins such as Tether (USDT) and USD Coin (USDC).
Invest in different cryptocurrency blockchains.
Cryptocurrencies function due to blockchain technology. On the other hand, Blockchain platforms have much more functionality, and they are in high demand in virtually every sector because of the solutions they can generate. The Ethereum blockchain is the most popular due to its ease of use, the ability to execute agreements without a third party, and the ability to build dApps on its platform.
Cardano (ADA), which aims to be scalable, secure, and efficient, is a competing blockchain. Blockchain service provider EOS (EOS) offers smart contracts, cloud storage, and decentralized applications.
Diversify by market capitalization.
Bitcoin may occupy the majority of the crypto market share, but there are a number of altcoins worth considering that have different market caps. For example, the market cap of one crypto might mean it’s more stable and has more robust fundamentals, but the market cap of another crypto might mean it’s growing fast.
Diversify crypto projects by location.
You can experience a wider variety of innovations by crypto businesses if you select cryptocurrency projects from countries worldwide. However, keep your distance from crypto projects in places where crypto is banned or restricted. Instead, focus on innovation areas, such as El Salvador and Portugal.
Invest in different industries.
Different industries offer cryptocurrency opportunities. In particular, the financial sector has been a significant adopter of crypto. Using a peer-to-peer blockchain network, DeFi allows people to conduct digital transactions without being governed by a third party such as a bank.
A growing number of users are trading virtual assets in a global market using crypto in the world of video games at the same time.
Branch out to different asset classes.
Investing in digital assets is part of several asset classes, giving investors even more diversification options. Asset classes most commonly include cryptos used as a store of value or a medium of exchange, like Bitcoin and Ether (ETH), the native cryptocurrency of the Ethereum network.
Another type of asset is utility tokens, which grant access to a platform for specific products. Among utility, tokens are Basic Attention Token (BAT), Golem Token (GLM), and Filecoin (FIL). Another class of digital investments is non-fungible tokens, or NFTs.
Diversify by risk level.
When you build a crypto portfolio, it might be a good idea to allocate more to the cryptos that have been around the longest, like Bitcoin and Ether. Then, for portfolio risk management, stablecoins could be added. After that, you might add a smaller percentage of riskier emerging crypto projects with various applications.
Buy puts to protect your assets.
Puts can be bought speculatively or to protect existing positions or portfolios. “Once you buy puts, profits get generated when the cryptocurrencies value drops in value relative to another,” explains Marius Bogdan Dinu for Crypto Adventure. “Puts offer the buyer the right to sell his cryptocurrencies at a specific price and a particular date.”
For instance, let’s assume you bought a put option for $10 on BTC/USDT with a strike price below market (BTC = $200) of $180 for 28 days, and the price fell to $120 at the expiration date. By then, you’ll have generated a profit of $50 (or $60 to $100), almost five times what you paid.
“Puts have one significant advantage; losses are limited, and the most you can lose is the premium you paid for the put,” he adds.
It is important to note that not everyone has the perfect strike price or expiration date,” Bogdan states. Setting a strike price for crypto should always consider your risk tolerance and your bias towards the market. When the strike price locks in a minimum value of assets in your portfolio, you will achieve dependable portfolio protection at a fixed cost.
Dollar-cost averaging can lower your risk.
Instead of investing a large sum in cryptocurrency all at once, break your investment down into smaller amounts. For those unfamiliar with this, it’s called dollar-cost averaging. And, it’s possible to invest smaller sums automatically at regular intervals on many crypto exchanges.
Using dollar-cost averaging will lower your exposure to market swings and eliminate the need to constantly judge the market’s mood. Additionally, it reduces the temptation to make emotional investments.
The dollar-cost averaging approach is great, but there’s no harm in accumulating some extra dry powder (or dry money), ready to scoop up assets at a steep discount if the market crashes. However, you’ll need liquidity to do this. To put it another way, you can’t jump on market opportunities if all your money is invested in investments.
A typical investment strategy is to lock up money to earn a return. Users of vaulted crypto deposits get a yield on their deposits while maintaining liquidity. While some platforms require lockups for interest earners, Vauld offers users the option of not locking up their earnings.
HODLing and long-term thinking.
There is some truth to the statement “there is no loss until you sell.” Unrealized losses only occur once you sell your assets for less than the price you paid for them when the value has gone down since you bought them, explains the Coinbase team.
- Since its inception, Bitcoin has shown a consistent upward trend. Price falls are likely to bounce back due to economic drivers such as scarcity, even if caused by a temporary correction or a longer bear market. In the future, many people believe that cryptocurrencies like Bitcoin will continue to rise in price due to this limited availability. Positive price movement can be considered temporary if your investing timeframe is longer than weeks or months (years rather than weeks or months).
- Bitcoin has proven to be the most successful asset in the last decade, as it has been held for long periods of time.
In countries like the United States, holding cryptocurrency for a longer period of time may also be tax beneficial, they add. It may be more advantageous to hold for a year or longer than sell immediately.
Get crypto insurance.
I’m sure you know that the Federal Deposit Insurance Corporation, an independent agency of the federal government, insures up to $250,000 per person and per bank. This includes all checking, savings, money market deposit, and certificate of deposit accounts. Unfortunately, at the moment, cryptocurrency is not covered — but the FDIC is considering it.
In short, there’s no federal protection for cryptocurrency. That means you’re on your own. But, there may be a solution through insurance.
First, let’s address the elephant in the room. Private insurance does exist for crypto like Bitcoin. However, at present, private crypto-insurance is not generally available to consumers; instead mainly purchased by exchanges and crypto-wallets. This policy covers crime and theft, custodial insurance coverage, and commercial insurance.
The good news? There’s at least one exception.
With its Crypto Shield product, Breach Insurance offers crypto investors a regulated insurance product. The company has licenses and regulations in 10 states, including Massachusetts, California, and New York. Purchase of a policy is restricted to residents of the states listed. But, the company is expected to expand into more states.
At present, Breach Insurance covers 20 kinds of coins within exchanges such as Coinbase, CoinList, Gemini, or BinanceUS. Breach Insurance does not cover those in third-party wallets. Whether your crypto is stored cold or hot, the policy will cover hacks and exploitations of exchange wallets. Your deductible can range from 5%, 10%, or 15% of the policy amount. Coverage ranges from $2,000 to $1 million.
A token purchase is the simplest way to get started with cryptocurrencies. But, there are ways to explore the crypto world without risking considerable swings in your investment, such as;
- Invest in crypto companies. Crypto companies are commonly listed on public exchanges. Instead of buying the coin itself, you can buy shares of Coinbase Global or PayPal Holdings, which benefit from the business proceeds from their crypto-related operations. Furthermore, you can purchase shares of companies that manufacture cryptographic hardware, like Nvidia and AMD.
- Buy cryptocurrency ETFs or derivatives. You can invest in crypto with exchange-traded funds (ETFs). Stocks, commodities, and bonds make up an ETF, and in the case of crypto, they follow an index or sector. For some crypto products, options and futures are available, but these advanced types of investment vehicles also come with risks.
- Find a job in the crypto industry. Companies like LinkedIn, Indeed, and Monster list thousands of crypto job openings. A boom in blockchain jobs is happening whether you come from a finance background or a software engineering background. You can also find blockchain jobs on Cryptocurrency Jobs.
It’s ultimately up to you whether or not to jump into the crypto waters, but keep in mind that it’s not the only place you can invest. Likewise, cryptocurrencies aren’t the only digital assets to consider, as NFTs are also digital assets. Finally, make sure that if you decide to dive into digital currencies, you have a good wallet to store them.
Frequently Asked Questions About Adding Crypto to Your Retirement Portfolio
1. How can I fold crypto into my retirement plan?
Self-directed IRAs and solo 401(k) plans are the most convenient ways to purchase crypto in retirement accounts. Bitcoin IRA, BitIRA, iTrust Capital, and IRA Financial, among others, offer crypto-backed IRAs. Nevertheless, retirement account giant Fidelity has made it possible for workers to put up to 20% of their 401(k) savings in bitcoin, all from the account’s main investment menu.
Regardless of the exact plan you chose, the self-trading area of the platform allows you to trade digital assets inside your self-directed retirement account once your account is funded.
Another option is to invest directly in digital currencies on a crypto exchange, such as IRA Financial. With the help of a U.S.-based exchange, investors can purchase all the significant cryptocurrencies directly with their retirement funds. The account holder’s responsibility is to control 100% of the account, and they can trade whenever they desire.
2. What coins should I choose?
For the most part, cryptocurrency experts prefer established coins like Bitcoin and Ethereum to upstarts.
Coin selection is correlated with the level of risk an investor is willing to take. Bitcoin and Ethereum are the two biggest cryptos with the least risk. However, they are still subject to price fluctuations. For example, the value of bitcoin dropped from $65,000 in late 2021 and early 2022 to $31,000 within just a few months. In May 2022, it was trading at around $39,000.
In addition, smaller, less established cryptocurrencies may have a higher level of volatility.
3. How much money should I invest?
According to a Yale study from 2019, between 4% and 6% of a portfolio should be allocated to cryptocurrency. The study included all cryptos, including bitcoin, XRP, and ether specifically. Financial advisors, CFPs, and other money experts increasingly recommend a crypto asset allocation of 1% to 5%. Some investors, however, may be able to allocate up to 10% of their risky investments to cryptocurrencies, and possibly even more for young investors.
Ultimately, this depends on your age, level of wealth, and level of risk tolerance. What’s more, the allocation of crypto needs to remain in alignment with investment objectives.
4. If I make money on crypto trades, do I have to pay taxes?
Short answer, yes.
Whether they are purchased, sold, or exchanged, Cryptocurrencies need to be declared to the IRS. Crypto investments are generally treated like other investments, including stocks and bonds, depending on your particular circumstances.
If you didn’t sell or exchange your crypto for another type, you do not need to report it on your tax return. You also do not need to report buying or holding crypto. However, as with stocks and bonds, you’ll need to report any gains or losses you realize if you sell or exchange cryptos.
5. What are the risks of investing in crypto?
Investors in cryptos should be aware that there is almost no protection for them. Moreover, this digital currency is a concern due to its volatile and hype-driven nature. Specifically, there are valuation concerns, and prices can dramatically change quickly.
Crypto scams should also be on your radar. Pump and dump schemes are often used to scam people into buying a specific token, resulting in its value rising. As a result, scammers sell out, dropping everyone’s price.
Furthermore, criminal activity, including theft and hacking, is a possibility. Millions of dollars have been lost due to cyberattacks in cryptocurrency’s short history.
As of now, you’re on your own based on the US government’s policy. Unlike bank accounts, crypto does not have deposit protection at this time. However, following President Biden’s March executive order, which directed agencies to examine digital assets for risks and benefits, this may begin to change.
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