JUN 12, 2014
Why Bitcoin might soon make your 401k obsolete
More and more investors are considering Bitcoin as an alternative investment. The problem is that the process is still extremely complex and requires keeping a close eye on the portfolio.
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One practice that is used by investors around the world is diversification. Diversification simply means not putting all of our eggs into one basket. Smart money managers spread the total amount of investment capital across as wide a range of investment styles and asset classes as possible. Diversifying your investment portfolio is especially important for investments that are being used for your retirement.
Over the last few years a large number of people were fortunate enough to buy in when Bitcoin was priced at $35 and sell when it reached $1000. This profit can of course be used for further investment but many people will want to set aside a share of the amount towards retirement planning. This is usually done by including “alternative investments” into your portfolio and allowing from 5%-10% of your retirement portfolio.
Investment advisors are usually quite knowledgeable about alternative investments. The problems with Wall Street and stock markets in general over the last decade have made many investors looking for new options, alternate investments. If these investment are used for cryptocurrencies, the new crowd of potential investors could make advisors rethink their policy of only allowing accredited investors (more than $1,000,000 investment and $200,000 in earnings for the previous two years) in the door. The old policy was enacted so that a potential investor would be able to absorb a total loss and had to accept a lack of transparency that is inherent in the most common investments.
Investors are now allowed to add a small amount of alternative investments to their portfolio as long as the investments are exchange traded funds that invest in REITs and commodities, both high risk/high return investments. But with this ability, smaller investors can get access to investment styles and higher quality hedge fund managers that were previously used only by the already rich.
It turns out that more and more investors are considering Bitcoin as an alternative investment. The problem is that the process is still extremely complex and requires keeping a close eye on the portfolio. There are currently no Bitcoin investment vehicles available. There might be some in the works but they will require approval by the SEC before becoming available, a process that can last for years.
There is also currently no method for buying bitcoins in a qualified investment account. The only way to get the job done is to have a self directed retirement account and be an accredited investor under the above definition and the process is quite lengthy.
The current rules apply only to investments that are traded on the stock exchange. Bitcoin Investment Trust is offering an investment opportunity for bitcoins, however. The Trust is a private, open-ended trust that is not available on the open market and not traded on any exchange. This trust is also only available for accredited investors however and as a private and unregistered investment it is not subject to regulations that exchange traded investment vehicles are.
They are not required to provide either standardized pricing or reporting, which implies substantial risk. The Trust is modeled after the SPDR Gold Fund in that the Trust simply buys Bitcoin and deposits it into the account. When you invest you are essentially buying a piece of the entire Trust and your size is based on the value of the trust. If the value increases, your share increases, if it decreases, you lose.
The current market generally keeps the smaller investor at bay, limiting their access to serious Bitcoin investment accounts, which severely limits retirement possibilities. There are several developments on the horizon however, like Winklevoss Bitcoin ETF. But for now, the average investor will still have to move funds out of bitcoins and into traditional currencies if they want to play where the real money is and be protected by regulations.