4 principles to remember before you include cryptocurrency in your retirement investments
Cryptocurrencies like Bitcoin and Litecoin have gained popularity in recent years, with many famous athletes and actors endorsing digital currencies and drawing people into the exciting concept. Platforms like Coinbase and Robinhood allow individuals to buy, sell, and spend cryptocurrencies, also known as crypto.
However, it is important to understand what cryptocurrencies are and the risks associated with them. Cryptocurrencies are a form of electronic money that exists only in digital form. Unlike traditional forms of currency, cryptocurrencies are not insured by the Federal Deposit Insurance Corporation (FDIC) and are not issued or backed by any central bank, such as the Federal Reserve.
One of the key characteristics of cryptocurrencies is their volatility. The market for cryptocurrencies has experienced significant price fluctuations. For example, the price of one bitcoin reached a peak of $64,972.24 on November 10, 2021, but dropped to $26,107.57, a 60% decline, on August 20, 2023.
Before investing in cryptocurrencies, it’s important to think carefully and consider several factors. Investment laws regulate the sale of crypto, and the federal government is trying to educate investors about the potential pitfalls and scams associated with this investment. It’s essential to align crypto investments with your overall investment strategy, risk tolerance, estate planning, and income taxes.
Consulting with a professional financial advisor can provide valuable insights and guidance. If you have always been a conservative investor, investing in cryptocurrencies can be very risky. It’s important to consider your risk tolerance and how crypto fits into your overall investment plan. Your financial advisor may also recommend adjusting your portfolio or implementing strategies to offset the added risk.
Estate planning is another important aspect to consider when investing in cryptocurrencies. It’s crucial to share the details of your crypto accounts, including passwords, with your loved ones to ensure that the assets are not lost in the event of disability or death. Legally, crypto accounts can complicate estate planning, especially if your assets are held in a trust. Failing to align your crypto account with your estate plan can result in delays and additional costs during the settlement process.
Risk tolerance is a critical factor to consider when investing in cryptocurrencies. While making money can be exciting, it’s important to assess the impact of potential volatility on your overall financial well-being. Unlike traditional forms of investments, cryptocurrencies do not have the same level of protection, such as FDIC insurance or Securities Investor Protection Corporation (SIPC) insurance for brokerage accounts.
Tax policy is another important consideration. Cryptocurrency transactions may have tax implications, and it’s important to follow the tax rules and keep records of transactions. Starting in 2023, crypto retailers will be required to issue 1099 tax forms, providing information on gains or losses made on cryptocurrencies. Planning for taxes and setting aside cash for tax payments is essential to avoid creating cash flow problems.
In conclusion, cryptocurrencies can be an attractive investment for some individuals, but it’s important to approach them with caution and awareness of the risks involved. Considering factors such as investment strategy, estate planning, risk tolerance, and tax implications can help individuals make informed decisions about investing in cryptocurrencies. Consulting with a professional financial advisor can provide personalized guidance and help mitigate potential risks.
