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Digital (crypto) assets provide investors a unique chance to participate in a brand-new asset class. As younger crypto-savvy investors come of age, financial advisers face pressure from customers to give exposure to this new asset class. As the asset class grows, advisors that can provide clients this exposure will expand their client base and AUM.
Digital assets in retirement accounts offer investors alternatives to diversify risk and optimize growth. This article examines why investing in crypto makes sense in general and in retirement plans.
Why Invest in Digital Assets?
Standout Performance
Their value has increased as general interest and support for digital assets have increased. Each new retailer who takes bitcoin as payment, each new exchange that allows digital asset trading, and each new financial services organization that provides them promotes the long-term sustainability and widespread adoption of this new asset class.
As the widespread use of digital assets occurs, demand grows. And since the supply of certain cryptocurrencies, such as Bitcoin, is fixed, greater demand tends to enhance their value. Even now, digital assets are still in an early phase of their lifetime, so investors who opt in today will profit from these developments.
Bitcoin’s outperformance of traditional equities shows the performance potential of digital assets over the last five years (2016-2021). Bitcoin produced the highest returns relative to AMD, Facebook, the S&P, and gold, rising by over two orders of magnitude throughout the time.
Diversification
Many investors feel that investing in a combination of stocks and bonds diversifies their portfolios to decrease risk. However, this is not always the case. Investors need a wide variety of assets from several asset types to build a genuinely diversified portfolio.
When diversifying a portfolio to hedge against macroeconomic unpredictability, gold and silver are the conventional assets of choice. Now digital assets are fast becoming the new “digital gold and silver,” providing an additional means of hedging against market dangers. Considering the possible inflationary pressures posed by the rapid rise of the money supply relative to economic production during the COVID epidemic, this is of utmost importance.
In a diversification strategy, the absence of connection between digital assets and conventional asset classes is one of the primary benefits. During the last six years, Bitcoin has maintained modest correlations with both the S&P 500 and gold.
The Next Generation of Technology
Digital assets and blockchain technology are at the forefront of expansion in almost every industry. The present phase of the blockchain-based business and investment ecosystem has striking similarities to the internet boom of the late 1990s and early 2000s, which created a large number of millionaires and billionaires. Therefore, digital assets play a significant role in future technical developments and wealth generation. Their value to investors will continue to increase.
Specific Advantages of Retirement Accounts
Most middle-class investors’ investable funds are likely held in retirement accounts. Consequently, they constitute a substantial portion of AUM for most financial advisers. One of the key ways advisers can assist their customers in enjoying the advantages of digital assets is by offering crypto exposure in these accounts.
Enhance the Effectiveness of Active Management
Due to the tax-deferred or tax-free status of retirement plans, advisers can take advantage of short-term market developments by rebalancing and reallocating the portfolio’s asset allocation without triggering a taxable event. With traditional investment accounts, advisers may be constrained to yearly rebalancing and/or reallocation to retain a long-term capital gain tax position. When this is not the case with retirement accounts, advisers can more actively manage portfolios by purchasing on dips and selling on peaks as they occur without triggering taxable events. Such carefully controlled tactics can have large consequences over time.
Optimal Lifetime Performance & Risk Management
Because retirement accounts require keeping assets invested until retirement, it makes sense to account for the prospect that monetary policy may disrupt or even destroy the present economic order and pave the way for a new one, similar to what occurred with the Internet in the early 2000s. Digital assets provide a one-of-a-kind chance to diversify into an asset class that is uncorrelated with the stock market or the U.S. dollar and reflects Web 3.0. This means you can balance your investment performance and risk throughout a lifetime.
The Ideal Crypto Asset Allocation
The ideal mix and distribution of digital assets in a portfolio for retirement rely on the investor’s investment plan and risk tolerance. Most advisers and asset managers recommend an allocation between 1 and 5 percent, which provides a solid platform for enhanced returns with minimum risk. A bigger allocation to digital assets may appeal to more risk-seeking investors.
Conclusion
Digital assets provide investors with an excellent chance to diversify risk and optimize growth in their portfolios, most of which are held in retirement accounts. Especially as younger, more crypto-savvy investors come of age, investment advisers who can help their clients through investing in crypto in these accounts have a fantastic chance to expand their client base and AUM in the future. The next critical step for advisers is comprehending the many alternatives and products that give this exposure to clients.
