The first Bitcoin individual retirement account (IRA) was approved by the United States Internal Revenue Service (IRS) in 2016; it is appropriately named BitcoinIRA and allows clients to buy actual bitcoins or a certificate that can be redeemed for a certain amount of Bitcoin. This has created a legal and regulated avenue to add Bitcoin to one’s retirement portfolio.
Cryptocurrency and Bitcoin can be a beneficial addition to retirement portfolios for several reasons.
First and foremost, the Bitcoin and cryptocurrency markets have tremendous long-term potential. In the short term, there is extreme volatility in Bitcoin’s price, as can be seen in the past year with Bitcoin’s price rising to USD 20,000 in December 2017 and declining to less than USD 6,000 in June 2018. However, in the long term Bitcoin’s price has been going up by orders of magnitude. In 2010 a couple of large pizzas were purchased for 10,000 bitcoins. At the time Bitcoin was worth USD 0.003 each, which would be USD 30 in total. Now those 10,000 Bitcoins are worth USD 59 million as of this writing, a phenomenal 200 million percent increase.
Since retirement accounts are meant for the long term, the short-term volatility of Bitcoin doesn’t matter. If the long-term trend continues, putting Bitcoin in a retirement portfolio could be extremely profitable. Some experts are calling for Bitcoin’s price to increase by orders of magnitude; John McAfee is certain Bitcoin will hit USD 1 million. This actually makes sense when considering that institutional investment into Bitcoin is just beginning, and only a tiny fraction of institutional money being invested into Bitcoin could push Bitcoin’s price up by multiple orders of magnitude. Bitcoin’s market cap is only USD 100 billion, whereas institutional investors control hundreds of trillions of dollars.
Also, putting Bitcoin in a retirement portfolio can act as a hedge against government actions. Governments can print fiat money at will, resulting in significant inflation. Bitcoin cannot be printed at will, so if fiat inflation occurs then Bitcoin’s price relative to fiat will increase. Essentially, Bitcoin can insulate an investor against fiat inflation, which is very important in the long term since even the most powerful fiat currencies like the USD can experience inflation in excess of 1,000% in a lifetime.
Finally, cryptocurrency helps diversify a retirement portfolio, adding another option besides stocks, bonds, commodities, assets, and real-estate. Diversifying is important to ensure that the failure of any single investment mechanism doesn’t ruin the entire retirement portfolio.
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