With the insane rise of value, cryptocurrencies are a hot asset class that you most probably have heard in the past few months. Can this relatively new class of assets help in your retirement?
- Cryptos have become a hot asset
- You CAN use your retirement funds to invest
- Be aware of the potential risks when investing with retirement funds
What Makes Cryptocurrencies so Great
Back in 2008, a person only known through the online persona of Satoshi Nakamoto published a paper that laid the groundwork of blockchain, a completely revolutionized method of handling ledgers. Crucial to the network are miners, who maintain complete copies of the ledgers and are interconnected to update the ledgers.
These miners have to solve complex mathematical calculations in order to gain the right to write down a group of validated transaction on the ledger. Since anyone can become a miner, this makes cryptocurrencies free from centralization where normally only the middleman, such as a bank, can only maintain the ledger. A majority of the miners have to agree on their ledgers matching, giving the books security against manipulation.
Blockchain gives miners only two ways to earn: the reward for finding the block, or the group of transactions and the transaction fee itself, making them very cheap in comparison to banks. The ledgers are secure, the whole network is faster and economical than the traditional alternative. This is what makes cryptocurrencies great.
The peer to peer nature had already pushed cryptocurrencies to new heights as more and more people realized its unlocked potential.
Can Cryptocurrencies be my Retirement Fun?
It depends on how you look at it. It all boils down to what your retirement plans are in the first place and if there’s any regulation or legality involved.
When talking about your 401(k), it depends on what the employer actually selects as the basket of options for you. Bitcoin and other cryptocurrencies are treated as assets and therefore, they can be given as an option. However, since a trustee of the 401(k) is a fiduciary and held responsible for the liabilities, they rather tend to not offer cryptos as an option. So unless and until your employer has a crypto class on the table, you cannot use your 401(k).
However, there are other options that you might consider. Why not save and buy some cryptocurrencies directly? Many cryptos, such as Bitcoin, are designed to be deflationary in nature. This means that as more coins enter the market, the issuance gets slower. Many compare this with gold and other precious metals. Thus, cryptocurrencies like these can be very attractive as a personal retirement plan. Bitcoin, for example, has outgrown even gold in the past few years.
How to Get Started with Cryptos
The best way to go about it is to sign up on a reputed crypto exchange. Depending on your location, you might want to look into this carefully as you might not be able to clear the KYC and AML checks. You might also want to look into registering on an exchange which allows traditional money funding if you don’t already have access to cryptos. Usually, signing up on P2P exchanges is easier.
Once done, you can simply buy your favorite crypto and put it away for long term storage. Ideally, you should look into investing in a hardware wallet. These USB devices are physical storages that you can safely disconnect from the network for security. Alternatively, you can go for a paper wallet, where all the related information is stored on a piece of paper that you can simply file away. Hot wallets are easier, but are always at the risk of hacks. Remember, never share your passwords (or private keys) with anyone.
If idle assets is not your thing, you can leverage the boom of DeFi (Decentralized Finance). The concept of farming, where you provide your tokens as liquidity providers and then earn has enabled countless people to make money rather than have their crypto assets sit idle. Think of it as a savings account equivalent. There are many crypto platforms online that offer yield farming. Take the lending sector in DeFi, for example. You provide your bought crypto to people who are in need of it. Using smart contracts, you can lend your crypto without the need of a middleman. The offered collateral is locked up in the contract and your crypto is sent to the borrower, who then has to return the assets along with the interest as per agreed rates.
The interest is deposited periodically and when the contract time is over, your principal amount is also returned. You are never at risk because if the borrower defaults, the contract simply liquidates the collateral and returns you your amount.
Be warned though, cryptocurrencies are notorious for their volatility and their prices can crash. On the other hand, the immense rise in value in the long term has always yielded profits. We advise you to learn more about any specific crypto you might be interested in and only put a portion of your savings into it, diversification of your retirement portfolio being key.
If you are interested in cryptocurrencies as a retirement fund, be sure to check out IRA Financial’s partnership with Gemini. You can self-directed your plan and invest in Bitcoin and other popular cryptos!