How Cryptocurrencies Can Help Pay for Your Retirement

01/10/2018 02:34 pm ET

A decade into the evolution of cryptocurrencies like Bitcoin, digital currencies are becoming more common elements of the global financial system. Unlike fiat currencies, which are based on the trust, credit-worthiness and reputation of different governments, digital currencies are universal.

Cryptocurrency can be used in any country, and they retain their value regardless of fluctuations of stability in a specific state or region. This is particularly attractive in third world countries where hyperinflation, political instability and corruption have hobbled local financial ecosystems and made money transfers and exchanges risky and prohibitively expensive.

One enterprising company, NagriTech, a producer of organic pesticides and other agricultural solutions in developing markets, is launching a cryptocurrency token to facilitate financial transactions in countries where high inflation and currency devaluations have made it difficult for farmers and producers to secure credit. “Inflation rates in Venezuela are just insane, we’re talking about thousands of per cent per year and this country heavily relies on agriculture. Brazil, India, Mexico and Peru, all these countries have problems with inflation and farmers have many difficulties being US dollar or Euro-dependent because of high inflation and regulations and limits imposed by central banks,” explains Yevgeniy Kozarenko, CEO of NagriTech.

Cryptocurrencies rely on an advanced computing technology called blockchain; this technology records transactions throughout a network, is virtually unhackable and inflation-resistant. Blockchain technology is also being used for a number of other technology applications, either currently used or in development; this includes items like reward programs that can effect transfers through multiple companies or technical processes that speed up cloud computing.

Bitcoin is just one variety of cryptocurrency; other types have been developed and are attracting widespread media and investor interest, including Ethereum, Ripple and Litecoin. These digital currencies can be used to pay salaries, trade other coins or tokens, and became an object of speculation -- delivering some remarkable returns for investors over the past year. Although the S&P 500’s gain of 19.4% in 2017 was impressive, Bitcoin rose 1,318% last year -- and even that stellar performance was eclipsed by Ripple’s stunning 36,018% annual gain.

And this is where cryptocurrencies and retirement accounts have an interesting intersection.

An IRA is an individual retirement account that allows individuals to make tax-deferred investments to provide financial security when they are ready to retire.. Assets are typically invested in stocks, bonds, mutual funds, etc. When an individual is over retirement age, they are able to withdraw that money to live on throughout their retirement. A 401(k) is a qualified profit-sharing plan set up by employers, that allows employees to contribute a portion of their wages to individual accounts.

Elective salary deferrals are excluded from the employee’s taxable income. These accounts are expected to earn money for their owners, on a tax-deferred basis, making them a better investment over time than just keeping cash available. When the stock market falls, however, the value of retirement accounts can sustain severe losses.

The most recent demonstration of this was in 2008 and 2009. During the collapse of the housing bubble, seizure of credit markets and several notable bank failures, IRAs and 401ks lost around $2.4 trillion in total. Although the stock market has recovered, for the most part, from that recession. For those savers at the end of their working careers, however, there was nowhere near enough time to recover the lost savingss; even younger workers may never see similar compounded returns in the future.

Investors are often told that the best way to protect their assets is to diversify their investments. Through 401k plans, this is often done by adjusting their investment mix to include different percentages of stocks, bonds, mutual funds, etc. IRAs often have this option as well, and sometimes offer more control over the day to day investments of plan assets. Some investors choose to have some of their funds in a more stable account, such as an IRA, while they keep other funds more liquid in order to invest in businesses, short term opportunities, and other investments.

One of the biggest advantages to investing in Bitcoin and other cryptocurrencies is that, like precious metals and other non-correlated assets, they do not depreciate or lose value when the stock market trades downward. The IRS approved Bitcoin as a commodity in 2014, but stated that for it to count as an investment, a custodian must be involved. Most IRAs (Roth, SIMPLE, and so forth) operate through banks and other investment companies, which do not traditionally accept commodities as investments in retirement accounts.

However, if an investor wants to include Bitcoin or another cryptocurrency in their IRA, they can do that through a self-directed IRA. This is a type of retirement account that allows for investments into commodities, such as real estate, promissory notes, private placement securities – and cryptocurrencies like Bitcoin, Ripple, Ethereum and Litecoin.

According to Travis Parker, COO of IRA Bitcoin LLC, a company based in Calabasas, California specializing in cryptocurrency-based retirement accounts, “investments in these kinds of assets have unique risks that investors should consider. Those risks can include a lack of disclosure and liquidity -- as well as enhanced risk of fraud.” The solution is to work with a U.S.-based company that has significant experience in cryptocurrency investments and an understanding of how to transfer or rollover plan assets from 401ks and IRAs into Bitcoin or other cryptocurrencies to make sure that investments are handled properly.

Prices for cryptocurrency can be volatile and a reputable company can simplify the transfer process and make sure that investors get timely execution at the most favorable pricing available, as well as regular reporting for their investments.

Instead of investing in fiat currencies that subject valuable retirement funds to the whims of state politics, investors can benefit from focusing on the kind of investment assets that are represented by cryptocurrency. These investments don’t fluctuate in tandem with the stock market, aren’t easily hackable, and offer a definitive and clear ownership backed up not on a single server, but across an entire network. Cryptocurrencies can be spent at a number of different companies already through secure digital wallets, including Microsoft, Expedia, Newegg and over 100,000 merchants worldwide and the number of companies accepting these payments are increasing daily.

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