The short answer is ‘no, not really.’
Bitcoin is a hot topic these days in the financial world. It was invented in 2009 when it was released as open-source software. This allowed users to mine bitcoin and use it as currency.
Since then bitcoin has skyrocketed and also plummeted in value. This has generated a lot of excitement and concerns for investors. Many analysts and institutions say bitcoin is unstable and risky to invest in.
Warren Buffett once told reporters, “It’s a gambling device… there’s been a lot of frauds connected with it. There’s been disappearances, so there’s a lot lost on it. Bitcoin hasn’t produced anything.”
Let’s walk through the basics of bitcoin. Then we’ll look at the risks of investing in bitcoin.
What is bitcoin?
Bitcoin is one of several cryptocurrencies. In other words, it’s a currency just like the Euro or the Peso. But it’s a digital currency. In order to send or receive bitcoin, you need a virtual wallet. Your virtual wallet holds your bitcoin.
Blockchain is a public ledger which records all transactions with bitcoin. To use bitcoin, you must create a permanent address. Whenever you send or receive bitcoin, it’ll be publicly recorded. This means using bitcoin is not private.
The basic unit is a bitcoin, which is represented by the symbol (₿) and abbreviated BTC. There is a millibitcoin, abbreviated mBTC. These are worth 1/1000th of a bitcoin. The smallest unit is called a Satoshi, which is one hundred millionth of a bitcoin.
Units are registered to a bitcoin address. Once they are transferred, the units become registered to another’s address.
How do you make money from investing in bitcoin?
The most common way individuals try to make money is by simply buying and selling bitcoin.
Some try to do this with tangible currencies. Let’s say you trade U.S. dollars for Euros because you believe Euros will increase in value. Later on, you trade the Euros back for more U.S. dollars.
There’s a similar strategy with bitcoin. Investors buy bitcoins hoping they’ll increase in value in the future, then sell them to make a profit.
Some investors are buying and holding bitcoins, believing they will appreciate in value in the distant future.
This complicated process requires specialized equipment, specialized software, and tons of electricity.
Miners record all the transfers of bitcoin. Then they clump this data together in a ‘block’ and send the information to blockchain (Remember that’s our public record of all bitcoin transactions). In return, blockchain rewards the miners with new bitcoins.
This activity is only profitable when done on a large scale. The main players are warehouses where electricity is cheap. They’re full of expensive mining hardware.
There are sites that offer you the option of mining through the web. Supposedly, you’re using their equipment to mine and receive some of the profits. However, these sites are widely considered to be scams.
What are the risks of bitcoin investments?
Almost every investor and advisor will tell you that bitcoin is extremely volatile. It’s susceptible to sudden change at any moment. Here’s the history of bitcoin’s worth in U.S. dollars:
You can try trading, but keep in mind this is a highly risky investment.
In addition, there are a lot of scams in the bitcoin world. Many investors have reported losses of money to Ponzi schemes.
These schemes promise high, fast returns. But what they’re doing is using the money received from new investors to pay previous investors. The high-interest rate entices a lot of investors, but the model is unsustainable. Eventually, the schemer disappears with whatever money’s left.
Bitcoin is not heavily regulated or policed, making it easy for schemers to operate.
The future of bitcoin
Bitcoin is still in its early stages. It has the potential to grow into a new world currency in the future. But for the time being, it’s volatile and unpoliced.
Bitcoin is a brilliant invention, but it’s wise to wait to see how the currency develops. For now, there are better ways to invest your money.
4 Ways To Lower Your Taxes In Retirement
With the likelihood of higher taxes in the future, it’s important to do as much planning as you can today to minimize your taxes during retirement. While nobody knows what the future holds, taxes generally go up over time, meaning even in retirement you could be faced with significant tax bills.
Fortunately, there are steps you can take today to help minimize your taxes in the future. Here are four ways you can help lower your taxes in retirement.
1. Know the Difference Between Each Retirement Account
401(k)s are tax-deferred. You contribute pre-tax income, and your employer may match your contributions up to a certain percent. When the time comes to start withdrawals, the money will be taxed as ordinary income. You can invest up to $19,500 in a 401(k) for 2020, plus an additional $6,500 catch-up contribution if you’re over 50 by the end of the tax year.
Roth 401(k)s are tax-free. Unlike a traditional 401(k), you fund a Roth 401(k) with after-tax dollars. This means your withdrawals are tax-free and penalty-free, as long as you’ve had the account for five years and are at least 59½. As an added benefit, there are no income limits on Roth 401(k)s. It makes this type of retirement account an attractive option for high-earners.
IRAs, or individual retirement accounts, are tax-deferred. Your withdrawals in retirement will be taxed as ordinary income. You can contribute up to $6,000 in 2020, plus a catch-up contribution of $1,000 if you are 50 and older.
Roth IRAs are tax-free. Because you contribute after-tax income now, you get tax-free withdrawals in retirement.
2. Know What Type of Investments Should Go Into Different Accounts
Investments That Should Go In Taxable Accounts: Index funds, ETFs, buy-and-hold stocks and tax-exempt municipal bonds should be held in taxable accounts.
Investments That Should Go In Tax-Free Accounts: Fixed income, REITS, commodities, liquid alternatives and other actively managed investments should be held in tax-deferred or tax-free accounts so you can grow the account without paying taxes along the way.
3. Prepare Now For Required Minimum Distributions
Under the CARES Act, all RMDs have been suspended for 2020. But you should plan for them to be reinstated at any time. If you have a 401(k) or a traditional IRA, you’ll have to start taking required minimum distributions (RMDs) every year.
If you turned 70½ in 2019 or earlier, you may have already started to take your first RMD by April 1 of the year after you reached 70½. For the rest of us, if you turn 70½ in 2020 or later, you can now wait to take your first RMD by April 1 of the year after you reach 72. To make sure you comply with the complex rules, our advice is to consult with your financial professional.
4. Consider a Roth Conversion
If you have a year with a particularly low-income level compared to normal, consider doing a Roth conversion. The conversion is a taxable event, so you’ll face a higher tax bill the year you convert, or you can slowly convert your accounts over a few years to help break up the tax implications. Critically, by converting to a Roth, any future withdrawals will be tax-free. Additionally, Roth IRA’s have no RMDs, so you aren’t forced to withdraw money every year.
All of these tips involve your retirement account, so consult with a financial or tax professional to make sure any of these changes are best for your individual situation.
Get In On The Hottest Investment Trend Today: SPACs
The hottest new investment trend right now are SPACs, or special purpose acquisition company. It’s how Nikola Motor Company, which plans on making both electric and hydrogen-powered trucks, went public virtually overnight.
With the IPO market cooling, it has become an appealing alternative for private companies looking for a quicker and easier path to being publicly traded.
Now billionaires are tripping over themselves to create SPACs as quickly as possible. They need to do so if they want to get in on the gold rush.
What are SPACs?
SPACs are commonly referred to as a “blank check” company and with good reason: they are created to go around gathering a bunch of money from investors with the only goal to buy an existing business within a specific time frame, usually 18 to 24 months.
The management team essentially has a blank check to go out and buy any business it sees fit. Some are created with a specific acquisition in mind. Others are created simply to have the money in place and ready to go when the opportunity arises.
The structure is very similar to private equity deals or leveraged buyouts. Also, private equity firms, hedge funds, and other “smart money” investors sponsored the creation of many SPACs.
Many of these SPACs are publicly traded. So, if the idea of having “smart money” go around hunting for the best deals on your behalf sounds appealing, you can typically invest in them through your normal brokerage account.
Here’s a short list of SPACs that you can either buy today or can buy very shortly once they go public. Be aware, many of these SPACs are just a few weeks old. So, there isn’t much history to judge their performance by.
Pershing Square Tontine Holdings (PSTH.U)
Fresh off a billion-dollar payday in March, Pershing Square Capital Management’s Bill Ackman just launched a $4 billion SPAC, the largest in history after overwhelming interest from investors.
Ackman has the right to put in another billion, giving the company access to a total of $5 billion to hunt for what Ackman calls a “unicorn” with “significant long-term growth potential that will be likely candidates for inclusion in the S&P 500 index.”
“Our thesis is by having a $5 billion cash pile in a public company; it’s our own version of a unicorn. It’s a one-of-a-kind entity,” Ackman said during an interview with Yahoo Finance. “So, we’re looking to marry a unicorn. So we’re prettying ourselves up for the most attractive possible partner.”
Churchill Capital IV (CCIV.U)
While not publicly traded yet, this will be founder Michael Klein’s fourth SPAC. Two of them have acquired companies and one has yet to find an acquisition target. To highlight investor demand for SPACs, Klein raised $1.8 billion for his fourth SPAC. This figure stands at 80% more than what he originally planned.
With his latest SPAC, Klein is looking for a company with excellent long-term growth prospects, a strong competitive advantage, recurring revenue, attractive free cash flow. He is also looking for a company that is in an industry where consolidation opportunities exist.
Dragoneer Growth Opportunities (DGNR.U)
Like Churchill Capital, this SPAC is not yet publicly traded. The company is lead by CEO Marc Stad, who appeared multiple times on Fortune magazines “40 Under 40” list. Also, other directors include David Ossip, CEO of Ceridian HCM Holding, and Sarah Frier, CEO of neighborhood social network Nextdoor.
Stad has a strong pedigree, having backed a number of very successful companies in the past, including Spotify and Uber Technologies. Dragoneer will focus on six areas: software, internet, media, consumer/retail, healthcare IT, and financial services/fintech.
East Resources Acquisition (ERESU)
Current Buffalo Bills and Buffalo Sabres owner Terry Pegula started East Resources targeting the energy industry in North America.
It makes sense given Pegula’s history, having sold his company, East Resources, to Royal Dutch Shell for $4.7 billion in 2010.
Now Pegula is back, looking for operational control of a company that has long-lived assets with low fixed costs, that is producing oil and gas and generating free cash flow, but is operating below full capabilities.
With Pegula’s extensive knowledge of the oil and gas industry, he could find multiple opportunities in a short period of time.
Thinking About Annuities? Here Are 10 Things You Need To Know
Most people think annuities are simple: you hand over a lump sum payment, agree to wait a certain amount of time, and then you start receiving monthly checks. But annuities are complex investments that come in many different packages. They can offer tremendous benefits if set up correctly and provide a steady stream of income during retirement.
If you are thinking about an annuity, here are 10 things to know before you buy.
1. Deferred Annuities Offer Tax-Advantaged Savings For Retirement
A deferred annuity has two parts: the accumulation phase and the payout phase. In the accumulation phase, your money sits and grows over time, building up the value the longer you wait. You are in control of when you decide to start drawing income from the annuity. Therefore, you are also in control of when you will start paying taxes. During the payout phase, you will likely be in a lower tax bracket than during your working years, allowing you to keep a larger portion of your income.
2. There Are Ways to Reduce The Taxes You Pay
One of the potential drawbacks of a deferred annuity has to do with the way you withdraw money and the taxes owed on the payments you receive. Essentially, you are receiving earned interest first, which is taxable, before being paid back your principal, which is tax-free. A way around this is to convert a deferred annuity into an immediate deferred income or immediate income annuity. With these types of annuities, the monthly payment you receive is a mix of principal and interest, so only a portion of the payment is taxable.
3. You Can Switch Out Of One Annuity And Into Another
If you decide that your current annuity no longer fits your needs, under most circumstances you can switch into a different annuity without any tax consequences as a “1035 exchange.” For example, if you invested in one type of annuity in your 40’s or 50’s and now find that in your retirement years you prefer a fixed-rate annuity, you can make the switch, and as long as you had your original annuity long enough, there would be no surrender fees.
4. A Life Insurance Policy Can Be Swapped For An Annuity
If you have a cash-value life insurance policy that is no longer needed, you can use a “1035 exchange” to switch the life insurance policy into an annuity tax-free. As an example, if you convert a life-insurance policy into an income annuity, your policies’ cash value immediately becomes a stream of income when converted. And by converting to an annuity, you decide how long you want to receive that income by setting the terms of the annuity.
5. Red Flag: Fixed Index Annuities Have Some Drawbacks
The allure of a fixed index annuity is strong. You get to participate in the gains from a rising stock market without any worries of losing money in down markets. But the upside gains are capped, and depending on those caps, you may be losing a considerable amount. For example, a fixed index annuity may have a 6% cap rate. If the index gains 5% in a year, you may get all 5% credited to your account. But if the index gains considerably more, like 10%, you would only get 6% since your gain is capped. The annuity could also carry a participation rate, meaning you’ll get even less of the actual index gain. Be sure to read the fine print and shop for the best deal.
Come back to The Capitalist tomorrow for part 2 of the list.
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