Despite the global cryptocurrency markets seeing significant growth the last decade, the market still lacks the proper infrastructure for global adoption. From an investment standpoint, the traditional markets and crypto markets are highly fragmented. Investors value their assets being under “one roof”, but this is extremely difficult if investors hold digital assets. How could retirement accounts pave the way for higher adoption rates?
Passive Investing
Since 2008, investors have changed their approach significantly. According to a report by CNBC, passive investing accounts for nearly half of the U.S stock market. Passive investing leverages products like ETFs and passively managed mutual funds. Since these products don’t have portfolio managers “actively” managing the funds, they’re extremely cheap to own. With incurring lower expense ratios, this is more money going into investor pockets in the form of “total returns.” Many advisors criticize passive management, but the data speaks for itself. According to a report by Hartford Funds, passively large blend strategies have outperformed active large blend strategies for the last 6+ years.
This all matters because many investors are leveraging “self direct” accounts that give them the ability to manage their own assets. A self directed investment account has no financial advisor tied to it. The buying, selling, and allocation mix is all up to the investor, at a fraction of the cost.
How Does This Tie Into Cryptocurrency?
Most investors today have assets at the popular financial firms such as JP Morgan, Morgan Stanley, Merrill Lynch, and many others. Within these firms, many investors play in two arenas, having advised accounts and self-managed accounts. This gives them the ability to stay “disciplined” by ensuring that a financial advisor is overseeing most of their assets. Self-managed accounts typically involve investments that the financial advisor wouldn’t allocate in advised accounts for fiduciary reasons. If investors at these firms own Bitcoin, it’s difficult to oversee these investments since the large financial players don’t support or custody Bitcoin whatsoever.
According to a report, it’s estimated that 30 million Americans own Bitcoin. In Europe the estimation is even higher, as almost 40 million people are estimated to hold Bitcoin. The problem is the disconnect between digital assets and traditional assets. Investors have to navigate on a daily basis to oversee their digital assets. From a planning standpoint, it also makes it difficult to assess your overall investment strategy when digital assets aren’t being accounted for. We all know that Bitcoin and other digital assets aren’t making it into “advised accounts” any time soon, but smaller players in the financial industry are making moves to ensure that digital assets can be monitored and managed through self-managed accounts.
Kingdom Trust
Kingdom Trust is an independent qualified custodian that focuses on individual investors through self-managed accounts. The firm has over 100,000 clients and services $12 + billion in assets under custody. Kingdom Trust offers Self-Directed IRA ( retirement accounts ) that give investors the opportunity to hold Bitcoin in addition to real estate, precious metals, private company stock, single member LLC’s, hedge funds, and other alternative investments. Kingdom Trust recently introduced their “Choice Platform” that finally gives investors the ability to incorporate these alternative assets into self-managed retirement accounts. It appears that the firm has leveraged Interactive Brokers and Kraken. This makes it extremely easy for users to onboard traditional assets and Bitcoin within a single retirement account. It’s important to note that even self-managed accounts at the largest brokers in the world would have restrictions on many of these “alternative assets” that Kingdom Trust offers.
Benefits Behind The IRA
With Bitcoin being tied to individual retirement accounts, it creates potential benefits that were never relevant before. Placing Bitcoin in retirement accounts opens up the opportunity to “tax deferral,” meaning taxes wouldn’t be owed until you actually take the money out of the account. Returns through “tax deferral” simply means an investor can buy/sell/hold as much as they want in retirement accounts and not be liable for taxes until they take the money out in the future. This is substantially different from placing trades on Coinbase, where virtually every transaction can be a taxable event. It’s important to speak with a tax advisor to make sure you’re eligible and fully understand how individual retirement accounts work!
In addition, it’s important to understand other pros and cons of “bitcoin retirement accounts.”
Pros: Potential tax benefits ( mentioned above ) , diversification, and growing use cases on a global scale.
Cons: Bitcoin volatility, potential fees for platforms to custody Bitcoin, little underlying value metrics, and impossible to determine its future fate.
How Companies Like Kingdom Can Spark Adoption
Among the institutional space, we’ve seen continued interest in digital assets over the last year. As it was recently reported by Visionary Financial, Grayscale Investments ( largest asset manager in digital assets ) is seeing record inflow from various hedge funds. More and more institutional investors are diversifying in digital assets during market uncertainties and potential inflationary pressures. The institutional space in digital assets is getting stronger each year in terms of products and services. This is ultimately creating more comfort for high net worth investors, which is increasing demand. On the flip side, it’s the retail space that holds much more potential based on investor volumes.
Companies like Kingdom Trust can fuel retail adoption. As mentioned earlier, the financial industry is placing a lot of value on passive investing. This strategy has equated to more people managing their own assets through “self-managed” products. Kingdom Trust is giving investors the opportunity to rollover retirement assets which can be important for mass adoption. Unlike traditional Wall Street firms today, investors can’t collectively commingle their Bitcoin with traditional assets. This results in less motivation to diversify in the alternative assets like Bitcoin. If firms like Kingdom Trust really push the narrative of having your “Bitcoin and traditional assets” under one roof, then they have the potential to revolutionize the way people invest in Bitcoin. Retail investors in particular value efficiency when it comes to their investments. They want to log into their investment accounts and see what’s going on holistically. In the current environment, it makes it extremely difficult to incorporate Bitcoin into an investment mix since most firms won’t “custody” it for retail investors. Kingdom Trust is simply changing the narrative, and making it easier to manage retirement assets under one roof.
Retail Investors Already Showing Demand
Visionary Financial also pointed out in a recent report that the millennial generation is a group of retail investors that are interested in Bitcoin. Studies by Charles Schwab show that millennials have more interest in Bitcoin than other stocks like Disney, Microsoft, and Netflix. Opposed to buying Bitcoin directly, millennials are forced to purchase Bitcoin products in their traditional 401Ks. Despite this being a positive alternative, many investors would argue that they’d prefer to purchase Bitcoin directly. As mentioned earlier, companies like Kingdom Trust are interconnecting with cryptocurrency exchanges like Kraken to make this happen.
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