Strategies for Managing Bitcoin in Retirement
Determining the best way to manage bitcoin during retirement involves weighing the options of selling the cryptocurrency outright or leveraging it as collateral for loans. This raises a crucial question for retirees: Should they liquidate their bitcoins or use them to secure credit for their living expenses?
Evaluating Retirement Strategies for Bitcoin Holders
In a discussion on social media platform X, a user known as Wicked explored two distinct strategies for retirees holding 24 BTC, valued at approximately €2.5 million. The analysis is based on a challenging ten-year forecast where the retiree has set aside an amount equivalent to 50 times their annual living expenses, estimated at €50,000. The scenario unfolds as follows: In the first two years, a significant market downturn occurs, reducing bitcoin’s value by 50% each year, resulting in a decrease from €2.5 million to €1.25 million after the first year and down to €625,000 after the second. Consequently, the annual expenses shift from representing 2% of the initial reserve in the first year to 4% in the second year, and 8% in the third year. The analysis further predicts a market recovery in years three and four, with bitcoin prices potentially doubling each year, returning to their original value by year five, followed by a steady appreciation of 25% annually until year ten. This leads to an examination of which strategy—selling portions of bitcoin annually or borrowing against the holdings—would yield better financial outcomes over the decade.
Approach One: Annual Bitcoin Sales
Under the first strategy, the retiree opts to sell a portion of their bitcoins at the beginning of each year to cover their yearly expenses of €50,000. Wicked simplifies the scenario by assuming that no taxes apply to these transactions, a consideration that is valid in certain European nations like Portugal, Germany, and the Czech Republic, where long-term capital gains tax on bitcoin is often waived. Over a decade, the retiree’s bitcoin holdings would diminish as follows: In the first year, 2% is sold, leaving 98% remaining; in the second year, 4% is sold, resulting in 94% left; by the third year, 8% is sold, leaving 86%; and so forth, until only 74.6% of the initial bitcoin reserve remains after ten years. This remaining amount, calculated through rapid AI assessments, would be valued at €7,115,314, considering the predicted price fluctuations.
Approach Two: Utilizing Bitcoin as Collateral
In the alternative strategy, the retiree chooses to borrow funds annually against their bitcoin holdings, using the cryptocurrency as collateral rather than selling it. The assumptions in this scenario include a collateral requirement set at 2x, meaning for every 1% of reserve value borrowed, 2% of BTC must be locked as collateral. The terms stipulate a 10% interest rate that compounds yearly, with the retiree continuously rolling over the debt without making repayments. The evolution of debt and collateral over ten years is tracked as follows: In the first year, borrowing costs are calculated at 2%, leading to an initial debt of 2.2% after interest. Following another year of losses due to a 50% drop in bitcoin value, the debt increases to 4.4%, with collateral adjusted to 8.8%. This pattern continues with escalating debt levels until year three, where the debt-to-collateral ratio reaches concerning levels. Ultimately, after ten years, the retiree retains 100% of their bitcoin reserve, which would be valued at €9,537,322, though this is offset by €885,846 in accumulated interest debt.
Financial Outcomes and Risks
At the end of the ten-year period, the financial results indicate that the first strategy, which involved selling bitcoins, would yield a total of €7,115,314, with no liquidation risk as there was no borrowing involved. In contrast, the second borrowing strategy results in a net value of €8,651,477, but carries a significant risk of liquidation, particularly notable at the beginning of year three when the debt could amount to 50% of total savings. Under such circumstances, a further downturn in bitcoin’s value could lead to a liquidation event, causing substantial losses. For instance, if the price of bitcoin were to plunge from €104,000 to €13,000, it would be catastrophic for the retiree’s holdings. Despite the inherent risks, the adoption of bitcoin is bolstered by growing institutional endorsement, including support from U.S. financial bodies. Notably, the U.S. Vice President has been vocal in advocating for bitcoin’s potential.
Future Implications for Bitcoin Borrowing
The risk of liquidation diminishes for individuals who continue to work beyond retirement, such as those seeking to purchase property. This type of collateralized borrowing, referred to as “lombard loans,” is anticipated to gain traction in France in the coming years, akin to existing practices in the United States, exemplified by the establishment of 21 Capital, led by Jack Mallers. Current borrowing rates for such loans range between 9% and 13%, providing a feasible option for those looking to secure loans against their bitcoin assets.
