Bitcoin IRAs: What Are They And Should You Consider Them?
Cryptocurrencies are THE financial hot topic of the moment. Everyone who has seen the meteoric rise in the value of cryptocurrencies in 2017 (particularly of Bitcoin and Ethereum) is now kicking themselves. If only they had made an investment when the Bitcoin price was at the ‘low’ of $1,000, they could have realized gains of over 1,800% (as at December 2017)!
Because of their current popularity, more and more investors are starting to look at cryptocurrencies as a viable investment vehicle for retirement planning. In this article, we are going to give you the rundown on cryptocurrency investments for retirement accounts, specifically on using your IRA to invest in cryptocurrencies.
Cryptocurrency IRAs 101: What Are They?
You may have heard the terms ‘cryptocurrency IRA’, ‘Bitcoin IRA’, or ‘Ethereum IRA’. These are all the same thing: self-directed IRAs that can be used to invest in a range of non-traditional investments including precious metals, real estate, and cryptocurrencies.
The use of self-directed IRAs to invest in cryptocurrencies is very new. But then again, cryptocurrencies themselves are new. Few people know this, but the IRS issued a notice on cryptocurrency taxation in 2014. The IRS states that for federal tax purposes, investments in digital or virtual currencies are to be treated as property. This clarification paved the way for cryptocurrency IRAs, which are today quickly gaining in popularity.
So, at least for now, the IRS has no problem with cryptocurrency IRAs. But what are the rules about holding bitcoin, and how do you put bitcoin in an IRA?
Cryptocurrency IRAs 101: Basic Set Up
If you are unfamiliar with cryptocurrencies, even a simple investment may seem intimidating. What more using your IRA to invest in them! So we are going to give you two ways to set up a cryptocurrency IRA; a more complicated DIY version and a simpler ‘leave it to the professionals’ one.
Do It Yourself Set Up
For the DIY investor, step one is to register an LLC; something which is required to be IRS compliant. Your selected IRA custodian will hold said LLC as an asset. While you will not officially be the owner of this LLC, you will act as its manager and be responsible for all investments made through it.
Step two is to register an account on a cryptocurrency exchange. IMPORTANT: You must set up this account under the LLC’s name, not as a personal finance account. Not all cryptocurrency exchanges allow you to do this, so finding a suitable one may be a hassle. Here is a list of all the cryptocurrency exchanges; keep in mind that geographical restrictions apply in many cases.
Another thing to keep in mind is that if you are using a hardware wallet for storage (which we strongly recommend especially once you reach significant amounts), this wallet has to be owned by the LLC as well. An easy way to do this is to get a debit card that is linked to the IRA’s checking account to buy the wallet.
Leave It to the Professionals Set Up
If the above sounds far too complex, then you may decide to leave it to the professionals instead. The professionals in this case refer to IRA custodians specializing in cryptocurrency IRAs. You can get through the whole process with a minimum of hassle thanks to their guidance.
The only thing you have to do is to ensure that you choose the right professional for the job – one that accepts bitcoin investments. An excellent company that we recommend is Noble Bitcoin, a very reputable IRA company specializing in precious metals IRAs. Noble has an A- rating with the Better Business Bureau (with a spotless ZERO complaints record) and a 5-star rating on TrustLink. Contact them for a free bitcoin IRA guide.
Now that you know how to set up a cryptocurrency IRA, the question is, should you? Let’s analyze the benefits and risks of a cryptocurrency IRA.
Cryptocurrency IRAs 101: Benefits and Risks Analysis
The first thing you need to realize when considering investing in virtual currencies through your IRA account is the time horizon. Yes, the top cryptocurrencies performed spectacularly in 2017, but that’s just a one year time period.
When you invest in Bitcoins or other cryptocurrencies with your IRA accounts, the same withdrawal rules apply – a withdrawal age of 59.5 with a 10% penalty applied for early withdrawal. This means that your investment analysis will be a bit different from the current masses that are mostly into short-term cryptocurrency trading and holding.
Diversify Your Portfolio From Fiat Currencies – Currencies backed by nothing but faith in the system. A continuously increasing money supply. Farsighted investors know that ‘traditional investments’ are all ultimately dependent on the value and validity of fiat currencies. Hence, the smart play is to include assets which act as a hedge against the fiat currency system, such as precious metals and cryptocurrencies. You see, all cryptocurrencies are limited in supply, making them much more like commodities than modern currencies. For example, Bitcoin has a hard limit of 21 million coins, of which 16.7 million have already been mined.
Massive Returns Potential – The reason cryptocurrencies are so hot today. Take a look at the cost to buy Bitcoins; almost touching $20,000 as of December 2017. The price of Ethereum’s Ether has shown an even more drastic increase; up by more than 80 times since the beginning of the year! Simply put, even a small investment in cryptocurrencies could result in huge returns to your retirement accounts.
Risk Disclosures – Potential Downsides
Uncertainty Over the Long Term – Did you know that there are over 1,350 cryptocurrencies in existence today? Most experts don’t doubt that digital currencies will become an accepted and commonplace thing. What is in doubt however is which cryptocurrencies will be the ones that endure. It may not be the popular ones at the moment like Bitcoin or Ethereum. This creates uncertainty, particularly due to IRA withdrawal rules. The risk is greater the farther away from retirement age you are.
Highly Volatile – Almost everyone knows this, and it has kept many investors out of virtual currencies. The reason behind this is because cryptocurrencies trade more like commodities. Taking into account their limited supply plus a total value that is still quite small (a $587 billion total market cap in December 2017, still less than that of Apple) and you can see why they are still so volatile. However, this is less of a concern for IRA investors due to the aforementioned long time horizon. But watching your investments fluctuate so much in value can do a number on your nerves; don’t do it if you don’t have the emotional resilience.
The Security Factor – This is another thing that has put off investors. The hacks on cryptocurrency exchanges have been quite publicized and total losses have exceeded $500 million. But there is no doubt that security has been greatly stepped up since the ‘early days’ and most of the major exchanges today have minimal to no security issues. Further, you can always mitigate this risk further using cold or offline storage options such as hardware wallets.
Cryptocurrency IRAs 101: The Takeaway
Like any investment, starting a bitcoin investment has its own risks and benefits. While the risks are undeniable, they appear to be reducing over time while the benefits seem to loom ever larger. Most people are lured in by the short term gains, but as a long term investment, investors may be surprised at how much returns they can see from putting even a small percentage of their retirement portfolio in cryptocurrencies. Even aside from the potential returns, it seems evident that cryptocurrencies are here for the long run. And smart long term investors know it never hurts to invest in the future.