The financial world is abuzz with crypto. With new currencies added seemingly daily, investors can choose from many different investment options.
Yet, with crypto comes volatility and risk. How can you start investing in blockchain-based investment options?
What is Crypto?
Simply put, crypto is a digital currency. It uses blockchain technology, which enables secure digital storage of currency. There are many types of crypto, Bitcoin being the best known.
The blockchain is a digital database that timestamps each transaction. Blockchain records and verifies every crypto transaction and shows who owns it. Many blockchain databases operate on decentralized computer networks. Networks verify and control transactions; if there is a discrepancy, the computers resolve it.
Crypto trading is an attractive option for investors, provided you know how to manage and control your digital assets.
With thousands of crypto options available, it is important to understand what you are investing in. They work quite differently from other investment options. Additionally, the different crypto terms for trading and selling vary widely.
Many cryptos are not backed by hard assets or money. Companies can expand their business to generate more returns for investors. Instead, the crypto relies on bull markets for the currency. As the price increases, the value of your crypto investment also increases.
Crypto has come a long way in recent years. Initially, crypto owners had to transfer money to unregulated exchanges without any guarantee that they would receive Bitcoin in return. Today, crypto exchanges are secure and regulated, with easy-to-use integration and trading tools. Additionally, cryptography is common and increasingly accepted for payment across industries.
Understanding the cryptos you are investing in is essential. Know how they are traded, the rules for selling the asset and what happens when you do.
Investing in Crypto in a Solo 401k
There are many ways to buy cryptos and put them into your solo 401k. You can open an account with an exchange or a private party. The retirement account will own the crypto on a centralized exchange or stored in a wallet for your retirement account.
You can also use a digital asset managed fund, which is controlled by a third party. These funds generally operate as hedge funds for trading digital assets.
A solo 401k allows you to invest in blockchain startups involved in the crypto space or in funding projects. You can also invest in a Security Token Offering (STO), where tokenized digital securities are sold. Just like in an initial public offering, an STO allows tokens to be sold for real assets (income or stocks).
With some solo 401k, you can use crypto in an IRA to trade without capital gains tax.
In a solo 401k, the retirement account owns the coins, acting as the custodian of your IRA. You manage the associated LLC and make all investment and storage decisions.
You cannot buy crypto directly and put it in your solo 401k. There is no compliance or oversight structure to oversee these transactions. You must use fiat currency to fund your retirement contributions. The money can be used to buy crypto from an exchange or a trusted private party.
Crypto is a dynamic option for investors, especially when bundled together as part of a solo 401k.
What are crypto exchanges?
Most crypto is sold on exchanges, which engage buyers and sellers looking to close deals. Exchanges usually offer several crypto options to investors.
Investors must create an account on the exchanges they wish to use. Account holders must provide credentials to create accounts. Before you can buy any crypto, you need to fund the account. Usually, these funds must be in a hard currency, such as the US dollar, also known as fiat currency.
With your funded account, you can buy and sell different cryptos. A digital wallet stores your currency and can be held on an exchange or with an independent wallet provider.
You can use crypto purchased through an exchange as part of your retirement investment in a solo 401k.
What to expect when investing in crypto
Keep a close eye on your investments when engaging in crypto. Remember that the past is no indication of what will happen in the future. Yes, Bitcoin was only worth pennies and its value skyrocketed. However, this does not mean that such growth should be expected.
Investors should focus on the future, not what crypto has done in the past. Due to the nature of crypto valuation, the future should always be the focus.
Volatility is the norm with crypto investing. Wild market swings are the norm. Rumors and guesswork can cause the value of a crypto to skyrocket or plummet, all within minutes. Experienced investors who understand the fundamentals of a market and can react quickly can do well in crypto. New investors should tread carefully if they lack the experience and tools to react quickly.
Market volatility is leading some inexperienced investors to bail out crypto. In these situations, sophisticated investors often rush to buy assets at low prices. Volatility is hitting both established crypto and rising crypto.
You need to manage your risk tolerance. Develop a process that allows you to be comfortable with volatility. For some traders, this means taking a long-term approach, perhaps never even selling, regardless of the price. For short-term traders, setting rules, such as selling when the crypto drops 10%, may be the prudent approach.
New traders may want to keep some cash in reserve and experiment with crypto trading. As you learn, even if you lose some of your investment, you still have funds to invest.