Gold has traditionally played the role of a conservative and uncorrelated investment vehicle, but that is starting to be seriously challenged by Bitcoin...
Gold has played a vital role in economics and politics, influencing much of human financial activity through shifts in economic systems. It has proven versatile and stable across upheavals and social changes. It even became a vital tool in global trade and currency exchange as we know it today.
In the 19th century, gold was the backbone of the global monetary system. Nations relied on the gold standard until the Great Depression and World War I. These events were significant inflationary catalysts, and economies, in a decades-long transition, abandoned the gold standard.
This process culminated in 1971 when the Federal Exchange could no longer exchange US dollars for gold. In 1976, the gold standard was abandoned entirely, and gold became a free asset.
Today, it is still considered a reliable store of value with a well-established market. After all, it has had the luxury of centuries—through various cycles of prosperity and economic upheavals—to prove its reputation. Gold boasts high liquidity and can be easily traded or sold in multiple forms: bars, coins, jewelry, or other representative instruments.
GOLD VS BITCOIN: THE BATTLE OF UNCORRELATED ASSETS
In retirement investments, gold is an uncorrelated asset, showing an average annual return that has reliably kept pace with inflation. In times of economic uncertainty, investors move to gold because of its reputation as a store of value and its non-correlation with stocks, which makes it ideal during market downturns.
However, today's evolving monetary technology has provided investors with a new option: Bitcoin. Although it is a relatively new asset whose economic impact is still unfolding, Bitcoin has already been called "digital gold." It shares many characteristics with gold, including its capped supply and its potential as a store of value.
In addition, Bitcoin offers a new type of value in the age of connectivity. It can be transferred digitally, something that physical gold cannot do. It is the world’s first digital bearer asset, a remarkable feat achieved through the convergence of economic design, cryptography, and decentralized networks.
For investors, the perfect portfolio—a balance of assets that echoes an individual's risk preference and fits the economic climate of the times—is an ever-evolving target. All investors and professional fund managers seek new ways to add growth and diversification.
Retirees seek investments that provide diversification, preservation of wealth, and stability. On top of these, many retirees seek continued income that can only arise from growth—investments that capitalize on the opportunities of the times.
Finding the right mix of less risky, stable, and higher-risk growth assets has always been challenging for even the most experienced financial planners. Some believe Bitcoin fits into the new retirement portfolio as an added diversifier. Like gold, it can work as an uncorrelated asset and hedge against systemic risks.
BITCOIN IRAS: EXPOSURE TO THE BEST PERFORMING ASSET OF 2023
Another way to replicate current investment products is the creation of Bitcoin IRAs. The IRS considers Bitcoin and other crypto investments in retirement accounts as property. Government rules prevent Roth IRAs from holding "coins" and "collectibles," but these do not appear to cover Bitcoin.
According to NYDIG’s most recent reports, Bitcoin tops its 2023 returns list based on asset class. As of October 6, 2023, it boasts a 63.3% increase YTD, besting US large caps (28.2%), commodities (6%), cash (3.8%), and gold (1.1%). On a countdown to its next halving—around April 2024—many investors are eyeing Bitcoin as a possible addition to their retirement accounts.
Some IRA providers are already offering crypto investments in the form of cryptocurrency IRAs—specifically Bitcoin IRAs. A Bitcoin IRA works like any traditional self-directed IRA (SDIRA) and carries the same benefits. Instead of investing in Bitcoin directly and taking charge of one's custody, Bitcoin IRAs provide the investor convenience, security, and ease.
A Bitcoin IRA lets you buy and sell Bitcoin in a tax-advantaged retirement account. A Bitcoin IRA allows retirees to maintain traditional retirement accounts while having a separate account that invests in novel currencies like Bitcoin.
WHY ADD IT TO YOUR PORTFOLIO?
Many Bitcoin advocates promote Bitcoin as "digital gold." This simplified view has been held and promoted by those who believe Bitcoin can serve as a reliable store of value in digital form.
Based on this view, Bitcoin investments analogous to gold products are already being created. Just as gold ETFs hold physical gold as their underlying asset, Bitcoin products are structured similarly to these ETFs and provide exposure through funds traded on stock exchanges.
The first applications of Bitcoin ETFs have been lodged in recent years, with multi-trillion asset managers like BlackRock and Fidelity providing optimism about their future. The recent verdict of a DC court on Grayscale's bitcoin ETF application invalidating the SEC's argument for denying its Bitcoin investment product has been interpreted as a turning point for the industry.
Proponents of Bitcoin ETFs remain vigilant as efforts to gain approval for a spot Bitcoin ETF persist from prominent asset managers. Depending on how the SEC reacts, Bitcoin ETF approvals may follow, opening the floodgates for increased demand.
Image by Kanchanara on Unsplash
MAKE RETIREMENT PLANNING LESS COMPLEX WITH A BITCOIN IRA
Despite its status as a new asset, Bitcoin's performance in 2023 stood out for its ability to keep a narrow trading range despite intense external pressures. It's been trading sideways around the $25,000 to $31,000 range, resisting volatility and breakouts in either direction.
Retirees or those planning for retirement interested in adding riskier assets to their portfolios, moving with the times, and seeking avenues for future growth can add Bitcoin to their retirement investments without learning the technical nuances of keeping their Bitcoin safe.
They can set up Bitcoin IRAs either as traditional or Roth accounts. A Roth Bitcoin IRA permits tax-free withdrawals in retirement. A traditional Bitcoin IRA offers tax-deferred growth. Retirees in higher tax brackets can take advantage of this feature.
Why consider Bitcoin IRAs over purchasing and storing Bitcoin directly? Bitcoin IRAs extend to estate planning easily, providing a new advantage compared to traditional retirement accounts. Swan Bitcoin IRA, for example, offers enterprise-grade custody with insurance coverage. It provides a layer of protection essential for retirees who may not be well-versed in crypto security.
Moreover, Bitcoin IRAs provide a legal framework for individual investors, protecting them from tax issues, legal uncertainties, and non-compliance risks. Investors are assured that their investments are fully compliant with existing financial regulations.
Despite being a novel instrument, Bitcoin IRAs may provide a path for continued wealth-building during retirement. They offer the potential for growth, diversification, and tax advantages in one package within the framework of a familiar and regulated environment. They are one way to benefit from Bitcoin's uncorrelated nature and future potential.
As with any investment, retirees should consult a financial advisor to confirm whether a Bitcoin IRA investment conforms with their resources, risk tolerance, time horizon, and financial goals. In a brave new world of retirement planning, Bitcoin IRAs offer an alternative, innovative, and compelling proposition to explore the rewards of Bitcoin investments, even for those not delving into the technological complexities of crypto.