Hey everyone, it’s Finance Fridays again. I’ve been spending a lot of my spare time learning about and researching cryptocurrency. So, should it be part of your “retirement portfolio”, like a portion of your Taxable Account? Let’s discuss “Crypto as part of your Taxable Account”.

Stock Photo from: Pixabay

Crypto as part of your Taxable Account

I’ve talked before about how I think you should prioritize your investments in The Checklist. Make sure you don’t have any Credit Card Debt, have a plan for your Student Loan debt. Make sure you are maximizing your 401k/403b and 457 (if available), then doing your Backdoor Roth IRA, and then the next step would be your Taxable Account.

So then, should Crypto be part of your Taxable Account?

Well, in terms of taxes, it’s taxed the same as a taxable account. You will have to pay capital gains on it, either short term capital gains or long term capital gains. So in that sense, it’s very similar. However, in terms of risk tolerance, they are at opposite ends of the spectrum to one another. If you believe in The Philosophy, then your Taxable Account will be primarily composed of Index Funds.

• Buying and holding Dividend Stocks, is another tier higher of risk than just Index Funds, in my opinion.
• Picking individual stocks is essentially gambling, as I’ve said over and over again.
• Either of the above options should only be a small portion of your Taxable Account portfolio compared to Index Funds.

Where does Crypto fall in this risk spread then?

If picking individual stocks is like gambling with blackjack, craps, or roulette — then crypto is like playing the lottery.

As I’ve stated before, the chances that many of these cryptos will become worthless is very high. However, I believe that there will be some that survive and will truly change the world, in much the same sense that internet has changed the world. The only question is… which one(s)?

Obviously no one knows the future, and it’s even possible that the ones that do survive, haven’t even been build yet. For that reason, crypto is like the lottery — high risk, high reward.

Does Crypto belong in your Taxable Account portfolio?

For the majority of us… no, it doesn’t.

As I’ve advocated before, we as doctors make enough money, so just need to stay the course when it comes to retirement.

However, for those who are truly interested in the technology and want to come along for the ride… it’s probably ok to throw money that you’re ok losing at a few projects that you truly believe in. This means buy some cryptos that you believe in and just hold them long term, until at least 2025 or 2030 or so. Since this should be a small enough amount that you’re ok losing it, you won’t feel the need to sell during the repeated boom-bust cycles, (probable) eventual crash, and the rise from the ashes. Cryptocurrency is still in its infancy and it has a long way to go.

That said, this is completely outside of The Philosophy — and I’m sure the true Bogleheads will disagree with me.

However, for me, I’ve chosen a few cryptos I believe in long term and I’ve put a small amount of money that I am ok losing into them. If they become worthless, then I won’t shed any tears. On the other hand, if they do become world-changing in the future, then I can say I did my part and came along for the ride.

Wait, what about these Bitcoin IRAs? and Crypto Index Funds?

I don’t like either of them.

Bitcoin IRAs

Your IRA is for retirement, not for volatile asset speculation (gambling). Keep them separate. 

If you put any money into crypto, it is only the money you are willing to lose and only after you’ve maximized your normal retirement options.

401k/403b/457/IRA should remain Index Funds. FULL STOP.

Crypto Index Funds

The crypto index funds that I know of are Crypto20 and Coinbase’s Index Fund.

The idea of a Crypto Index Fund doesn’t make sense to me. The whole point of an index fund is broad market exposure. The crypto market is so small and so volatile that spreading your money out over the top 20 or even top 50 cryptos (by market cap) doesn’t do anything for you. As it stands right now, everything is coupled to Bitcoin so the market moves as a whole up or down.

This makes even less sense with Coinbase’s Index Fund of Bitcoin 65.25%, Ethereum 23.06%, Bitcoin Cash 7.64%, and Litecoin 4.05%. I don’t see any value in this kind of a small spread.

However, if someday we see a decoupling of coins from Bitcoin — such as Ethereum (ETH) or Ripple (XRP), and more fiat/crypto pairs come up, etc. then it may make sense at that point. To me, that is wayyyy in the future though. It would require thousands of relatively stable cryptocurrencies to make a crypto index worthwhile. Otherwise it’s just a middleman you don’t need (2% in the case of Coinbase and 0.5% for Crypto20).

At that point, if there were thousands of relatively stable cryptocurrencies, then they would probably just be absorbed into a broader index fund anyways. Maybe someday the Vanguard Total Stock Market Index will be the Vanguard Total Stock and Crypto Market Index, or something like that.

TL;DR

Crypto is gambling.

It can be a small part of your Taxable account portfolio if you like, but only what you can afford to lose.

Don’t do a Bitcoin IRA. Keep your retirement and crypto separate, both in account and mindset.

Crypto Index Funds don’t make sense… and likely won’t ever make sense.

Maybe someday the Vanguard Total Stock Market Index will be the Vanguard Total Stock and Crypto Market Index, or something like that.

-Sensei

Agree? Disagree? Questions, Comments and Suggestions are welcome.

You don’t need to fill out your email address, just write your name or nickname.

Like these posts? Make sure to subscribe to get email alerts!