If you’re in retirement or planning for retirement, you may have questions about cryptocurrencies. Read this to learn how to maximize your wealth management returns.
Bitcoin made big waves in 2017 when the price skyrocketed to almost $20,000. Mainstream interest in cryptocurrency grew as more people began experimenting with buying Bitcoin, Litecoin, Bitcoin Cash and other digital coins.
As with any investment, a large cryptocurrency purchase has the potential for both risks and rewards. If you’re working towards specific wealth management goals, or you’re in retirement or planning for retirement, you may have questions about cryptocurrencies.
Everything You Need to Know About Bitcoin Cryptocurrency
Bitcoin emerged in 2008 as the world’s first completely digital currency or cryptocurrency. A form of electronic cash, cryptocurrency uses encryption to process transactions and transfer value securely without the need for any intermediaries.
Bitcoin is a peer-to-peer network with a public ledger (the blockchain) that anyone can access, and there is no central bank or administrator. Bitcoin was the foundation for what has become a much larger cryptocurrency market.
Fans of cryptocurrency say the main benefits are that it’s:
- Free for anyone to join
- Extremely difficult for anyone to counterfeit or censor
While Bitcoin was the world’s first digital currency, there are now thousands in the world of crypto, and they vary wildly from one another. If you plan to invest in or make any large purchases with cryptocurrencies, we advise that you do your research before investing any of your resources.
Bitcoin vs. Bitcoin Cash
For all its benefits, the main downside of Bitcoin for many was the relatively slow speed of transactions.
For perspective, banks such as Visa process around 1,700 transactions per second. The Bitcoin network processes only seven per second. As the number of Bitcoin users increases, transactions take longer to process - as much as 10 minutes.
Bitcoin cash was started by bitcoin miners and developers who were concerned about Bitcoin’s ability to scale, given such slow speeds. In what developers call a hard fork, they altered the blockchain network's protocol to accelerate the verification process, essentially creating a new currency.
- Main advantages of Bitcoin Cash: cheaper and faster to use
- Main disadvantages of Bitcoin Cash: lower adoption rate and prices
Libra vs. Bitcoin
Facebook entered the cryptocurrency scene with their planned release of Libra. On the surface, Libra may seem like Bitcoin or any other cryptocurrency. But there are some astounding differences:
- Bitcoin is an open system in which anyone can process transactions and maintain the ledger or “blockchain”. Libra limits privileges only to members who have paid a hefty sum (to the tune of $10 million).
- Libra is backed by government-issued assets such as national currencies, bonds, and securities, while no outside assets back Bitcoin.
- Bitcoin is decentralized, which means no central entity controls it. By contrast, Libra will answer to The Libra Association, a global network of organizations (including corporations like Visa, Mastercard, Spotify, Uber, Lyft and eBay).
- The Libra Association will have powers similar to corporate banks: they can blacklist certain users, rollback transactions, and they retain total access to all of your financial information.
Crypto, Retirement and Wealth Management: Important Things to Know
In the world of cryptocurrency, things move rapidly. Rules will continue to change, and new regulations established.
To avoid surprises when it comes to crypto and wealth management, you need to stay informed and up-to-date. If you’re trading cryptocurrency or making large purchases with it, pay attention to these important points regarding the taxation of cryptocurrency:
- For federal tax purposes, the IRS treats cryptocurrency as property. (IRS Notice 2014-21 addresses the taxation of cryptocurrency transactions).
- You must pay capital gains tax on any profits from cryptocurrency, just as you would with any other type of investment income.
- The IRS plans to step up enforcement of compliance in cryptocurrency transactions, so be sure to report your earnings accurately.
Cryptocurrency appears to be here to stay, and the space continues to grow and evolve. Your financial planner can help you stay informed, compliant, and on top of your wealth management and retirement planning game.