Token Advice - #2 📈

Your Rich Life | Modern Investing Challenges | Crypto + Retirement Accounts | On-Chain Financial Planning | Getting Educated on Crypto

October 28, 2022

Hey everyone,

👋 Welcome to another monthly edition of Token Advice!

❓ So what is Token Advice? In short, Token Advice is a curation of what the 401 Financial team is reading, writing, listening to, and thinking about at the intersection of crypto, financial planning, and traditional finance. We didn’t see a newsletter that consistently combines these 3 topics, so we created one for you. We hope you enjoy!

Before we dive in, here is a quick update on 401 Financial!

🟪 401 Financial

401 Financial turns one month old 🎉

Tyrone talks nextgen advisor tips & more with Nasdaq 💡

401 Financial sub-advisory coming soon 👀

👇 Now let’s dive in.

4 Insights

“Leaving my job revealed different preferences for a “rich life” because I had a radical increase in my available time and my control over it. I no longer felt the urge to trade money for convenience because lack of time wasn’t an issue anymore. I realized that my rich life is simple things like waking up without an alarm clock, rarely having meetings, not having to work for someone else, and being able to live for a month or longer in different countries.” - Paul Millerd

There is a key lesson in here: You don’t have to live your life like everyone else does.

If you were financially free and able to spend time on whatever you choose, what would your life look like? In this post Paul gives some fascinating insights into how he changed his relationship with money and started down what he calls “The Pathless Path”.

Some people will continue to spend money on expensive cars, designer clothes, or luxury experiences. Others will spend money on philanthropy, starting a business, or traveling the world. The point is that there is no right or wrong answer. It’s all about what makes you happy. If you’re happy spending money on luxury items, then that’s what you should do. If you’re happy giving money to charity, then that’s what you should do. You’re the only one who knows what will make you happy.

One thing to remember with markets is that no one really knows where the next big move is going to come from. Every day we can tune into CNBC, Fox Business, or any other market source and we’re flooded with opinions about what direction the market is going to go. This makes it easy to get caught up in short term thinking. The problem is, our risk assets are aligned with our goals decades down the road, not goals we’re trying to obtain in the next 6-12 months. See the disconnect here?

The market is constantly changing and there are always new opportunities and new potential threats. How do we prepare for this? Having a process in place that seeks to remove emotional decision making is a great place to start. After that, we need someone to hold us accountable and actually follow the process. Discipline wins in the long run.

As Bob emphasizes, in an age of information overload we can’t listen to everyone. In this podcast he gives some excellent tips on how we can improve our chances of long term success by sticking to core principles such as broad diversification, low fees, and having patience.

₿ Crypto + Retirement Accounts

More than ever, investors are looking for solutions to invest directly in crypto within their retirement accounts. In a recent survey released by Schwab, a whopping 46% of Gen Z and 45% of Millennials wish they could invest in crypto within their 401(k).

This is impressive demand to say the least. Let’s look at a brief history of how we arrived at this point.

Since Bitcoin was founded, the vast majority of crypto investing has taken place on centralized and/or decentralized crypto exchanges such as Coinbase, Binance, and Uniswap. Given that these exchanges don’t currently offer retirement accounts such as IRAs, these assets were held in taxable accounts.

In 2013, Grayscale launched the Grayscale Bitcoin Trust (GBTC) as a potential solution to gain exposure to the price movement of Bitcoin through a traditional investment vehicle such as a Roth IRA. The trust has had its share of struggles and currently trades at a steep discount to NAV. Grayscale is currently attempting to convert the trust into an ETF, which would likely close the discount. However, there is no timeline for when this might occur. Up until recently, over-the-counter trusts such as GBTC were one of the few ways to get exposure to crypto within a retirement account. Investors have also turned to “crypto stocks” and “crypto ETFs” in an attempt to allocate to crypto in their traditional investment accounts. As you can see, owning “crypto” through these strategies is not the same as owning crypto assets directly:

Source: intotheblock

Today, companies such as Alto IRA allow investors to open self-directed crypto IRA accounts and purchase crypto directly. As more solutions become available, it’s important to know the benefits and drawbacks of investing in crypto in a retirement account.

By placing crypto in a tax-advantaged IRA, investors avoid paying capital gains tax on each of their transactions, potentially leading to significant tax savings in the long run. Furthermore, by opening and funding a crypto Roth IRA, taxes on crypto gains could be avoided altogether. If crypto continues on its exponential growth curve, investing these assets in a tax-advantaged manner could be a great strategy. On top of the tax benefits, the ability to invest in crypto in a retirement account could help diversify an investment portfolio and ease the barrier to entry for investing in the asset class. However, there are disadvantages at the moment as well.

Given the youth of crypto as an asset class, volatility remains prevalent. In taxable accounts volatility could be seen as a benefit, allowing investors to take advantage of tax-loss harvesting opportunities. Tax loss harvesting is not an option within the IRA structure. Additionally, there are opportunities to earn yield on crypto that is self-custodied or held at a centralized exchange such as Coinbase. For example, an investor has the option to stake ETH directly on Lido today and earn approximately 5.5%. As it stands today, this is not an option within crypto IRAs. By investing in crypto in a IRA, an investor is potentially passing up significant yield opportunities.

With Schwab, Fidelity, and other large traditional custodians getting involved, it’s likely a matter of time until these options are more widely available.

🧾 On-Chain Financial Planning

Per the Schwab survey outlined above, 43% of Gen Z, 47% of Millennials, and 33% of Gen X own crypto. This equates to tens of millions of Americans. Not only are younger generations holding crypto, they’re holding significant amounts of it. In our view, crypto can no longer be ignored when it comes to financial planning strategies.

The great news is, there are now tools for both clients and their advisors to see real-time crypto holdings data right alongside all their other assets. At 401 Financial, this all starts with Kubera, the center of our client experience.

Kubera supports it all, from centralized exchanges such as Coinbase, to self-custodial wallets on Ethereum.

Here is a look at how easy it is to link an on-chain crypto wallet. 👀

Crypto isn’t just an investment, it touches every part of a financial plan. As decentralized finance makes its way into every day life, we anticipate clients will position themselves to take advantage of the unique solutions self-custody provides. A few of these could include:

  • Getting paid and making payments in crypto

  • Earning yield in crypto

  • Crypto risk mitigation and insurance planning

  • On-chain asset management

  • On-chain estate planning

  • Expansion of NFTs into Real-World Assets

1 Bonus

📖 Getting Educated on Crypto - Crypto is full of opportunity. If you’re looking to hear where thought leaders think the space could go, the a16z Crypto Startup School is a great place to start.

Here is the first episode from Chris Dixon on Crypto Networks and Why They Matter 👇

📖 Looking for more? Check out the links below.

Final Bits

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📝 Long Form Reports

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