The 4% Rule with Bitcoin: Does It Work?

The 4% Rule is the sacred mantra of the FIRE movement (Financial Independence, Retire Early). The idea is simple: withdraw 4% of your portfolio annually and it should last at least 30 years. But does this strategy, developed for traditional stock-bond portfolios, work with Bitcoin? And how do different tax systems around the world affect this strategy?

In this article, we compare the classic 4% Rule with the Bitcoin Lending Strategy and show you which approach makes sense when.

What Is the 4% Rule Anyway?

The 4% Rule comes from the so-called “Trinity Study” of 1998, which analyzed historical stock and bond markets. Researchers found: If you start with a diversified portfolio (60% stocks, 40% bonds) and withdraw 4% of the initial value annually (inflation-adjusted), your portfolio survives at least 30 years in 95% of cases.

The Math Behind It

Example: You have a portfolio of $1,000,000.

• Year 1: Withdraw $40,000 (4% of $1,000,000)
• Year 2: Withdraw $40,800 ($40,000 + 2% inflation)
• Year 3: Withdraw $41,616 ($40,800 + 2% inflation)
• …and so on for 30 years

The idea: Your portfolio grows through capital gains and dividends faster than you withdraw – at least most of the time.

Sequence Risk: The Killer of the 4% Rule

The biggest risk of the 4% Rule is the so-called Sequence of Returns Risk. If markets crash in the first years of your withdrawal phase, you sell shares at rock-bottom prices and your portfolio never recovers.

Example: You start in 2000 with the 4% Rule → Dotcom crash → You sell at low prices → Portfolio dies in 15 years instead of 30.

Can You Apply the 4% Rule to Bitcoin?

Bitcoin is not a diversified stock-bond portfolio. Bitcoin is extremely volatile, pays no dividends, and has a completely different risk structure. But: Bitcoin has historically achieved much higher returns.

✅ Pro Arguments for 4% Rule with Bitcoin

• Simplicity: No lending, no platforms, no margin calls
• Tax Advantages (some countries): Zero or minimal capital gains tax in certain jurisdictions
• High Historical Returns: Bitcoin has grown much faster than 4% annually long-term
• No Interest Costs: You don’t pay lending interest
• No Platform Risk: Your Bitcoin sits in your wallet, not on an exchange

⚠️ Contra Arguments for 4% Rule with Bitcoin

• Extreme Volatility: Bitcoin can drop 50-80% within months
• Sequence Risk on Steroids: If you start in a bear market, your portfolio is dead after 5 years
• No Dividends: Stocks pay dividends, Bitcoin doesn’t – you must always sell
• Bitcoin Holdings Shrink: Every year you sell BTC – you don’t benefit from future price increases on sold coins
• 4% Is Probably Too Aggressive for Bitcoin: Many experts recommend maximum 2-3% with Bitcoin due to volatility
• Tax Impact Varies: In high-tax countries (USA, UK, Australia), taxes can eat 10-24% of your withdrawals

Tax Implications by Country: A Critical Factor

Taxes can make or break the 4% Rule strategy. Here’s how different countries treat Bitcoin sales:

🌍 Tax Treatment Comparison

Country	Bitcoin Sales Tax	Holding Period Benefit	Impact on 4% Rule
USA 🇺🇸	Up to 20% + 3.8% NIIT	Long-term: 1 year+	⚠️ Significant tax burden
Germany 🇩🇪	0% after 1 year	Tax-free after 1 year	✅ Huge advantage!
UK 🇬🇧	10-20% CGT	Some allowances	⚠️ Moderate tax burden
Switzerland 🇨🇭	Tax-free (private)	Wealth tax applies	✅ Good for 4% Rule
Australia 🇦🇺	Up to 47% income tax	50% discount after 1 year	⚠️ High taxes
Portugal 🇵🇹	0% (private sales)	No holding period	✅ Excellent!

💡 How Taxes Change the Strategy

Example: $40,000 annual withdrawal

• Germany/Portugal: Keep $40,000 (0% tax)
• USA: Keep ~$31,500 (20% + 3.8% tax = $8,500 to IRS)
• UK: Keep ~$32,000 (20% CGT = $8,000 to HMRC)
• Australia: Keep ~$26,000 (35% effective rate = $14,000 to ATO)

Over 30 years, this tax difference can mean hundreds of thousands of dollars.

4% Rule vs. Bitcoin Lending Strategy: Direct Comparison

Now it gets exciting: How does the 4% Rule compare against the Bitcoin Lending Strategy?

Criterion	4% Rule (Selling)	Lending Strategy (Loans)
Sell Bitcoin?	✅ Yes, 4% annually	❌ No, as collateral
Taxes (Tax-free countries)	✅ 0% (Germany, Portugal, Switzerland)	✅ Loans not taxable
Taxes (USA/UK/AU)	⚠️ 10-24% capital gains tax	✅ Loans not taxable
Bitcoin Holdings	❌ Decrease 4% annually	✅ Remain intact (100%)
Complexity	✅ Very simple	⚠️ Higher (platforms, LTV management)
Main Risk	🔴 Sequence Risk (bear market)	🔴 Liquidation Risk (margin call)
Interest Costs	✅ None	⚠️ 6-12% annually
Platform Risk	✅ None (own wallet)	🔴 Yes (insolvency possible)
Inheritance	⚠️ Bitcoin shrink over time	✅ Full Bitcoin holdings for heirs
Flexibility	✅ Stop/adjust anytime	⚠️ Bound to loan conditions

Conclusion from the Comparison

In tax-friendly countries (Germany, Portugal, Switzerland), the 4% Rule has a clear advantage: zero or minimal capital gains tax. This makes it attractive for risk-averse investors who don’t want to use lending platforms.

In high-tax countries (USA, UK, Australia), lending is often more tax-efficient since loans don’t count as taxable income. The 10-24% tax on sales significantly reduces the 4% Rule’s effectiveness.

Both strategies have extreme risks and are not suitable for everyone.

Calculation Examples: 4% Rule with Bitcoin

Example 1: The Optimistic Case

Starting Position:

• 10 BTC (bought 2020 for $7,000 per BTC = $70,000 invested)
• Current value: $60,000 per BTC = $600,000 portfolio
• Start of withdrawal: January 2025
• Bitcoin rises 30% annually on average (historical average)

Withdrawal Plan (4% Rule):

Year	Portfolio Value (Start)	Withdrawal (4%)	BTC Sold	Remaining BTC	Taxes (Tax-free)
2025	$600,000	$24,000	0.4 BTC	9.6 BTC	$0
2026	$748,800	$24,480	0.31 BTC	9.29 BTC	$0
2027	$941,136	$24,970	0.25 BTC	9.04 BTC	$0
2028	$1,153,051	$25,469	0.19 BTC	8.85 BTC	$0
2030	$1,838,736	$26,988	0.12 BTC	8.57 BTC	$0

Result after 10 years:

• Withdrawn: ~$260,000 (inflation-adjusted)
• Remaining BTC: ~8.5 BTC (value: ~$2,500,000)
• Taxes paid: $0 (in tax-free countries)

Assessment: In the optimistic case, the 4% Rule works excellently with Bitcoin. Your portfolio grows faster than you withdraw.

Example 2: The Bear Market Nightmare

Starting Position:

• 10 BTC (value: $600,000)
• Start of withdrawal: November 2021 (Bitcoin top $69k)
• Bitcoin crashes 2022 by -70% → $18,000 per BTC
• Slow recovery over 3 years

Withdrawal Plan (4% Rule):

Year	Portfolio Value (Start)	Withdrawal (4%)	BTC Sold	Remaining BTC
2022	$600,000	$24,000	0.4 BTC	9.6 BTC
2023	$172,800 (-70% crash!)	$24,480	1.36 BTC ⚠️	8.24 BTC
2024	$148,320 (even lower)	$24,970	1.39 BTC ⚠️	6.85 BTC
2025	$123,300	$25,469	1.41 BTC ⚠️	5.44 BTC
2026	$97,920	$25,978	1.44 BTC ⚠️	4.0 BTC

Result after 5 years:

• Withdrawn: ~$125,000
• Remaining BTC: ~4 BTC (from 10 BTC!)
• Portfolio value: ~$72,000 (from $600,000!)
• Portfolio is almost dead 💀

The Problem: You had to sell more and more BTC during the crash to cover the 4% (inflation-adjusted). Your portfolio never recovered.

Risks of Both Strategies in Detail

🔴 Risks of the 4% Rule with Bitcoin

• Sequence Risk: Bear market at the start = portfolio death
• No Recovery: Once sold BTC are gone – you don’t benefit from later recoveries
• Volatility: Bitcoin can drop 50-80% for months
• Psychological Burden: Selling at -70% is emotionally brutal
• 4% Is Too Aggressive: For Bitcoin it should be 2-3%
• Tax Impact (high-tax countries): 10-24% taxes significantly reduce effectiveness

🔴 Risks of the Lending Strategy

• Margin Call / Liquidation: Bitcoin drops → LTV rises → forced sale of your BTC
• Platform Risk: Celsius, BlockFi & Co. went insolvent
• Interest Costs: 6-12% annually eat into returns
• Complexity: LTV management, refinancing, understanding platforms
• No Guarantee: If Bitcoin doesn’t rise as expected, your wealth erodes

Honest Assessment: Both Approaches Are Risky

Let’s be honest: Both strategies can fail. The 4% Rule isn’t “safer” than lending – it just has different risks:

• 4% Rule: Risk lies in timing (sequence risk) and taxes (in some countries)
• Lending: Risk lies in platforms and liquidation

The “best” strategy depends on your risk tolerance, your country (taxes!), and your time horizon.

Which Approach for Whom? Decision Guide

✅ The 4% Rule Suits You If:

• You live in a tax-friendly country (Germany, Portugal, Switzerland – minimal/zero capital gains tax)
• You want simplicity – no lending platforms, no margin call stress
• You’re not starting in a bear market (timing matters!)
• You’re willing to let your Bitcoin holdings shrink
• You choose a conservative withdrawal rate (2-3% instead of 4%)
• You don’t want platform risks

✅ The Lending Strategy Suits You If:

• You live in a high-tax country (USA, UK, Australia – 10-24%+ capital gains tax)
• You want to keep your Bitcoin holdings intact (for yourself or heirs)
• You’re willing to manage complexity (platforms, LTV monitoring)
• You have emergency reserves to cover margin calls
• You’re long-term bullish on Bitcoin (5-10+ years)
• You use established, regulated platforms

💡 Hybrid Approach: Best of Both Worlds?

Some strategies combine both approaches:

• 50% Lending: Use half your BTC for loans
• 50% 4% Rule: The other half for tax-efficient sales (if in tax-friendly country)
• Flexibility: Withdraw more in bull markets, pause in bear markets

This approach diversifies your risks but is also the most complex.

Test Your Strategy: Bitcoin Refinancing Calculator

Want to calculate the lending strategy for your situation? Use our interactive Bitcoin Refinancing Calculator:

The calculator shows you:

• Monthly withdrawals over years
• LTV development and liquidation risk
• Comparison of different interest rates and Bitcoin growth rates
• PDF export for your planning

Conclusion: What Is the “Better” Strategy?

The honest answer: It depends on where you live.

For investors in tax-friendly countries (Germany, Portugal, Switzerland), the 4% Rule has a clear advantage through zero or minimal capital gains tax. If you want simplicity and start in a favorable market environment, it can work.

For investors in high-tax countries (USA, UK, Australia), lending is often more tax-efficient since loans don’t count as taxable income. The 10-24% tax on sales significantly reduces the 4% Rule’s effectiveness.

Both strategies have extreme risks:

• 4% Rule = Sequence risk (timing is everything) + potential tax burden
• Lending = Platform and liquidation risk

The most important lesson: Only invest what you can afford to lose. Neither of these strategies is a guarantee for financial independence.