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Should You Add Cryptocurrency To Your Solo 401k?

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What if you had invested $10,000 in the Amazon IPO? It’s probably no surprise that it would be worth something north of $8.5 million at the time this is written (stock return calculator). When you get in early with the right investment, the rewards can be tremendous. Amazon Founder, Jeff Bezos created a completely new financial paradigm during the dot-com bubble. Amazon not only survived the stock market crash but went go on to be the dot-com’s biggest success story.

Cryptocurrency Will Redefine the Economic World

It’s unclear if cryptocurrency will have the same path as Amazon. However, the last 10 years show it is certainly off to a similar start. Cryptocurrency is in the process of defining a new economy. This new economy follows the concept that decentralization provides an alternative to the mega-companies that now run the economy.

Importantly, national governments don’t regulate cryptocurrencies. Just as important, cryptocurrency is decentralized from the centralized banking system. This is a a new asset class, so do your due diligence. Spend time educating yourself. That’s because cryptocurrency could be the biggest financial opportunity that you ever have.

Alternative Cryptocurrencies To Consider

By now, almost everyone has heard of Bitcoin. But Bitcoin is only one of many cryptocurrencies (over 1500). Others include:

  • Ethereum
  • Litecoin
  • ZCash
  • Chainlink
  • LEND

Cryptocurrencies use a decentralized monetary system. Because crypto isn’t government-backed, multiple players exist in the space.  In other words, there is competition.

A good question to consider is, “what are the basics of how this can work?” Firstly, the internet is evolving… fast. Long gone are dial-up connections. Internet 2.0 was a reality before Smart Phones were indispensable in our lives. The next phase is a new technology: “Internet of Things” (IoT).

The Internet of Things

IoT is a catchall for everything connected through computers. Think of your smart refrigerator that knows when you need to buy milk. That’s the Internet of Things.  Inside IoT lies an important technology called “Blockchain.”

Cryptography secures the blockchain. The distributed ledger allows for secure transfers of data between parties. Though Blockchain is new, it is maturing rapidly. Blockchain is at the core of all cryptocurrencies.

Interestingly, the blockchain enables decentralized transactions. This means you avoid third party intermediaries and middlemen. Blockchain technology is much more secure than the current internet. Because it is decentralized, it is highly resistant to hacks (no central point of failure).  As such, blockchain technology scales more than centralized transactions that require third party computer systems. Eliminating third parties also eliminates the cost of third parties.

A Big Risk or the Next Amazon?

Bitcoin and other cryptocurrencies use Distributed Ledger Technology (DLT). Because blockchains use decentralized ledgers, multiple copies of transaction history exist. This creates an immutable ledger. In other words, no one can fudge the accounting.

The ledger is duplicated across the network of computers that are part of a particular blockchain. The fact that everyone receives a copy of the ledger makes the system nearly impossible to hack. Each transaction is permanent. Blockchains do not erase or alter data. For a hack to occur, individual records on millions of computers would have to be individually altered. Additionally, each alteration is recorded as a new and unique transaction.

Each transaction is a single “block” of information added to the distributed ledger. Single blocks create the “blockchain.” Every transaction is recorded for everyone to see. Because the blockchain database isn’t stored in any single location, the records it keeps are truly public and easily verifiable.

Cryptocurrency & Blockchain Technology

Ledgers are different from traditional spreadsheets. You can embed contracts in transactions. These are known as smart contracts, and they can execute simply by programming code into the blockchain. Currently, these contracts are relatively simple. However, the technology is maturing.  Smart contracts is where some of the biggest changes to the world economy happen. For instance, you can pay out earnings or losses when a financial instrument meets a certain benchmark. The transaction is automatic, instant, and without any oversight or clearinghouse.

This is not a new technological concept, Currently, we enter into simple contracts every day without a third party or intermediary. Consider buying an airline ticket. Today, we do this with a Smartphone app or from a webpage. Today, we enter our credit card information to a central clearinghouse that charges a small fee for the transaction.  With blockchain, you eliminate middlemen. Therefore, the entire transaction becomes a single transaction directly between you and the service provider.

Making Financial Markets Available to All

Significant is that this is all done for free – millions and billions of times every day. This is how cryptocurrencies eliminate third party costs. Interestingly, this is potentially the biggest change that decentralized cryptocurrencies bring to the economy. Bankers, stockbrokers, mortgage brokers, insurance brokers, and even contract attorneys will either go out of business or fundamentally change their business. Blockchain and cryptocurrencies represent tremendous opportunities for independent-minded Solo 401k investors. Peer-to-peer payments using blockchain open doors to direct interaction between parties.

But all of this is still in its infancy. No one knows exactly what is going to happen. Will one cryptocurrency become the Amazon of the blockchain future? Will others merge to outperform today’s leaders?

Certainly, cryptocurrencies are making inroads into the economy. If you take a close look at a 2019 IRS Schedule 1, there is a new question right at the top of the form. It asks:  “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

Right now, that question doesn’t have any direct tax implications. However,  it indicates the IRS already considers decentralized cryptocurrencies as part of the real economy.

Continue Your Education

At Nabers Group, we’ve been investing in Bitcoin since April 2013.  We will continue sharing information as the technology and investment opportunities evolve. Stay ahead of the learning curve with this series of articles:

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