- Bitcoin and other crypto outperformed many traditional investments in 2019 and is a favored investment among Millennials.
- Cryptocurrency is volatile, but industry experts recommending investing in it for portfolio diversity.
- There’s a way to invest in Bitcoin and avoid risk, and it’s determined by how much you buy.
Bitcoin and other cryptocurrency is here to stay, and is a popular investment among Millennials. According to the Grayscale Bitcoin Trust (digital currency product investors can buy/sell in their brokerage accounts), Bitcoin investments were the fifth largest holding among Millennial investors in self-directed brokerage accounts of a leading financial institution.
The price of Bitcoin may not be anywhere near as high as its 2017 peak, where one unit was worth $19,650. But as of Jan. 30, one Bitcoin is worth an impressive $9,300. Furthermore, Bitcoin and other cryptocurrency outperformed many traditional assets in 2019. Crypto investments are well-known to generate high returns with the catch: high risk.
Whether you invest with personal funds or retirement funds, almost every investor comprehends the volatility of Cryptocurrency.
Investment Diversification a Major Play
Yet, despite the apparent volatility of Bitcoin investments, industry experts say it is a good investment to hold in your portfolio. Crypto has a miniscule correlation with other popular investments, such as stocks, bonds and real estate. Asset allocation may be a tricky practice, but it’s the primary component to achieve portfolio diversification with your investments. If purchasing Bitcoin, there is a way to manage risk: only invest 1%.
“We need to acknowledge that 1% allocation isn’t going to materially harm a client,” said founder of Edelman Financial Engines, Ric Edelman, at the TD Ameritrade LNC Conference in Orlando, Florida on Wednesday
By allocating 1% of investment funds in Bitcoin, 20% in real estate, 30% in U.S. equities, etc., there is a good chance you will have sufficiently diversified your investments, without risking too much in Bitcoin investments.
Always Do Your Research
Even if you’re invest just 1% of your personal or retirement funds into Bitcoin and other cryptocurrency, perform due diligence. Experts highly recommend that investors not only learn about digital currencies, but the blockchain technology behind them. And if you do make an investment, make sure you’re in it for the long-haul, and you understand that you may lose all the funds you invested in Bitcoin.
Investing with Retirement Funds
Because of the complex IRS taxation of cryptocurrency, the best way to purchase Bitcoin and other crypto is with a retirement account, such as the Self-Directed IRA. The IRS rules state that crypto should be treated as property from a tax standpoint. But unlike property, you can walk into a Burger King and purchase a meal using cryptocurrency. This small purchases can quickly add up, yet investors must keep track of the value of every transfer, exchange or conversion – thus, creating the complexity.
To avoid the complex taxation of cryptocurrency, use an IRA or 401(k), which are tax-exempt entities. You won’t have to deal with Form 1099-K and detailing your capital gains and losses, whether your investment is short-term or long-term, etc. Your Self-Directed IRA or Solo 401(k) does not pay tax. Learn more about how to avoid cryptocurrency taxation with a retirement account.
At IRA Financial, we are not in the business of telling investors what type of investments to make. We do, however, offer educational material on how to make alternative investments by using a Self-Directed IRA or Solo 401(k) when established through a passive custodian.