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“Awareness is the greatest agent for change.”
~ Eckhart Tolle, Author of the Power of Now
A careful study of the history reveals that in every few years or so, a disruptive technology enters the market, attracting experts and investors from different fields, and promises to change the way businesses are run. But in a due course of time, the market correction takes place, eliminating a lot of companies and investor money in the process.
The Dot-com bubble was one such event, fueled by speculative investing; by the end of the dot-com company rush, trillions of dollars of investor money was lost.
Fast forward a few years, a new disruptive technology is here, “Cryptocurrencies.”While it might be unfair to compare it with the dot-com bubble, the investor sentiment, somehow, appears to be the same.
What is a cryptocurrency?
Investopedia.com defines cryptocurrency as “a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its most endearing allure is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.”
The key property of a cryptocurrency is that it is decentralized and it is as secure as a currency could get in the current times, almost uncrackable.
A Brief History of Cryptocurrencies
The first cryptocurrency, Bitcoin, emerged in 2008, developed by an anonymous internet user or group, Satoshi Nakamoto, and it was released globally in 2009.As soon as Bitcoin gained popularity, a number of Cryptocurrencies popped up in the market including Litecoin, Ethereum, Ripple, and Dogecoin. As of now, there are more than 800 cryptocurrencies in the market, having a market valuation exceeding $140 billion dollars.
How to Invest in Cryptocurrencies with Your Self-directed Retirement Plan?
Note: It is important to note that there are no current regulations allowing or disallowing cryptocurrency investments in retirement accounts. It is important to consult an expert before you invest in cryptocurrencies.
The current cryptocurrency frenzy has attracted individual investors seeking higher returns on their investments. We decided to address these questions with a quick guide.
- Step 1: Open a self-directed IRA or Solo 401k retirement plan and fund it with qualified rollovers.
- Step 2: Choose a cryptocurrency exchange (Coinbase, Kraken, or Gemini). When choosing a cryptocurrency exchange, go with the one having high trade volume and excellent customer reviews.
- Step 3: The next step is to get verified by the exchange, by uploading your bank account information. For security purposes, a majority of exchanges use two-factor authentication, allowing you to authenticate every transaction and be aware of your account activity all the time.
- Step 4: Once your bank account is verified, you’re ready for your first cryptocurrency purchase. Simply put the number of cryptocoins you want to purchase and the exchange will debit your bank account for an equivalent dollar amount. Once the transaction is complete and the cryptocurrency purchase has been confirmed by the network, your first cryptocoins are available for further action.
How to secure your cryptocurrency? After you have your first cryptocoins, use a web, mobile, or hardware wallet to secure them. Avoid keeping them in your currency exchange account for too long.
Taxation of cryptocurrency investments: In its 2014-21 Notice, the IRS discussed taxation of cryptocurrencies, labeling virtual currencies as properties. The sale of cryptocurrencies for a gain will generate capital gains, hence avoiding unrelated business income tax (UBIT) or any other tax consequences for your SD IRA.
Why You Would Want to Invest in Cryptocurrencies with Retirement Funds
- Invest in a promising technology: One of the key benefits of investing in cryptocurrencies is the opportunity to invest in an upcoming technology. A well-analyzed investment has the potential to offer long-term returns.
- Low investments: Depending on your investment timing, it is possible to purchase cryptocurrencies at reasonable prices, except the top cryptocoins including Bitcoin or Ethereum etc. If the project performs well, the chances of growth are exponential.
- Leverage the limited supply-demand principle of cryptocurrencies: Cryptocurrencies follow the limited supply-demand principle, allowing their tokens to appreciate with increasing demand. For an instance, the maximum number of bitcoins that can be created is capped at 21 million, and its rate of generation will gradually decrease in the upcoming years. This will help drive the prices higher, offering exponential returns in the process.
What are the Risks Involved in Cryptocurrency Investing?
- Lacking strict regulations: There are no strict regulations binding cryptocurrencies. Their global presence and decentralized operations make them untraceable and hard to regulate. The SEC has released its latest ruling regarding ICOs (Initial Coin Offerings), which states that depending on the specific “facts and circumstances” of an ICO, the offered cryptocoins might be considered as securities, and hence, will have to adhere to the agency’s regulations. However, stricter regulations for cryptocurrencies are a must to make them a secure investment for regular investors. It is important to monitor legal regulations governing virtual currenciews before you invest in cryptocurrencies.
- Speculative investing: Cryptocurrency investing is speculative in nature. Unlike stocks markets, these currencies are not backed by any product or robust business. In fact, several startups conducting ICOs do not even have a ‘market-ready’ product. Their prices are driven higher on speculative bets of future price appreciation.
- Fluctuating prices: It is normal for the cryptocurrencies to lose 10% or even 20% value within weeks. Their values depend upon their global acceptance, so if their global demand decreases, they are likely to plummet accordingly.
In a nutshell
Cryptocurrencies are in the market for almost 8 years. According to industry experts, they are here to stay, but the key to cryptocurrency investing is to be able to identify good investing opportunities.
Before you decide to invest in cryptocurrencies with your retirement money, educate yourself and find out everything you can about them. After all, you will need real cash to retire, so analyze every investment opportunity professionally.