Although traditional individual retirement accounts (IRAs) are a great means of achieving financial stability, in light of increasing market volatility worldwide, some investors are exploring alternative asset opportunities like cryptocurrencies to diversify their portfolios.
What is a Cryptocurrency IRA?
One can invest in Bitcoin and other cryptocurrencies through a crypto IRA as the IRS categorizes them as property. This is similar to investing in stocks and bonds and a crypto IRA is a type of self-directed retirement account, similar to a traditional IRA.
Self-directed accounts offer the possibility of investing in alternative asset classes such as real estate, precious metals, and cryptocurrencies, while being managed by a custodian, which is the main distinction.
How Does a Cryptocurrency IRA Work?
One can fund a Cryptocurrency IRA by using savings or by transferring funds from an existing IRA or 401(k) account. Moreover, selecting between a traditional and Roth self-directed IRA is possible, and the annual contribution limit of $6,000 (or $7,000 for those above 50 years of age) applies to both.
When contemplating a cryptocurrency IRA, it is important to bear in mind three fundamental distinctions from a conventional IRA.
- Custodian: The financial institution responsible for keeping your account holdings secured while also ensuring that they adhere to government regulations.
- Exchange: Cryptocurrencies are bought and sold on a Digital Currency Exchange (DCE), a platform that permits customers to trade cryptocurrencies for other assets, such as cash or other digital assets.
- Security: A key piece to invest in cryptocurrencies is knowing that your account is adequately secured from hackers. Proper security measures include multi-encryption coding for transactions and offline cold storage of private keys.
How to Choose a Cryptocurrency IRA Account
Finding a custodian willing to accept a cryptocurrency IRA was once difficult, but new market developments have opened up fresh investment possibilities for cryptocurrency traders. Due to the digital nature of cryptocurrencies, it is essential to find a custodian that specializes in digital asset services and security as opposed to those that manage tangible assets. Essential attributes in a company include domain expertise, security investment, and reasonable fee structures. Here are a few of the top-tier cryptocurrency IRA providers to consider.
iTrustCapital for Competitive Rates
iTrustCapital is the perfect solution for those seeking professional advisors and clear fees when starting an account. Since its establishment in 2018, iTrustCapital has simplified the process of purchasing and selling both cryptocurrencies and actual gold.
For beginner investors, iTrustCapital is an excellent choice because of their minimal rates and trading fee of only 1%. Additionally, instead of being subjected to various fees such as purchase charges or brokerage fees, customers only have to pay a modest $29.95 monthly service fee.
Choosing iTrustCapital is the ideal decision if your primary consideration is affordability with its 1% transaction fee and a minimal $29.95 per month service fee. It’s the best option if you’re a beginner in crypto investment or don’t have sufficient funds to invest.
Bitcoin IRA for Full Services
Bitcoin IRA, which was founded in 2016, is the primary and most extensive cryptocurrency IRA business currently in existence. Given their scale, they have the ability to provide an entire range of services, such as 24/7 immediate trading, safe offline cold storage, and a coverage policy worth $100 million.
New investors can start right away due to their website being easy to use and their vast knowledge base. Moreover, they offer the possibility to trade up to nine kinds of cryptocurrencies, such as Bitcoin, Ethereum, Ripple, and Litecoin.
Due to its comprehensive range of features and assistance, Bitcoin IRA is considered the best provider overall. It provides novice investors with a painless entry into the market and offers exceptional security measures to safeguard their funds. An account can be established with as little as an initial investment of $3,000.
BitIRA for Integrated Experience
The first and biggest cryptocurrency IRA establishment in the market is Bitcoin IRA, which was founded in 2016. Being the largest, they can provide a comprehensive range of services such as continuous real-time trading, safe offline cold storage, and an insurance policy of $100 million.
Getting started as a new investor is made easy by their website designed with users in mind and their vast knowledge base. Additionally, they offer up to nine cryptocurrency trade options, including Bitcoin, Ethereum, Ripple, and Litecoin.
With a comprehensive range of features and backing, Bitcoin IRA stands out as the leading provider. It provides an effortless means of entry for novice investors and furnishes first-rate protection to safeguard your finances. A minimum initial investment of $3,000 is required to create an account.
BitIRA for Integrated Experience
BitIRA is a company that provides a way to diversity retirement investments by investing in cryptocurrencies within IRA accounts. Their services include a Self Directed IRA for investment control, exchange access for buying and selling digital currencies, and a crypto wallet for asset security.
Regal Assets for Varierty of Investments
Regal Assets is the ideal firm for those seeking diverse investment prospects. They facilitate a wide array of cryptocurrencies and hard assets, granting investors the flexibility to customize their portfolios according to their preferences. The only downside is that with a requisite $25,000 initial investment, new investors may find this option unsuitable.
What Are the Benefits of Bitcoin and Cryptocurrency IRAs?
After gaining a basic understanding of bitcoin and cryptocurrency, it is worth considering some of the advantages that prompt investors to include them in their SDIRA.
- Potentially Higher Returns
- As history has proven, bitcoin and other cryptocurrencies can rise significantly enough to produce out-of-this-world returns for investors. Even though bitcoin was a bit more stable in 2021 than in previous years, Visual Capitalist reported that it still produced 59.8% returns compared to the 26.9% returned by the S&P 500.
Consequently, risk-seeking investors can benefit from potentially higher returns compared to traditional investments.
- As history has proven, bitcoin and other cryptocurrencies can rise significantly enough to produce out-of-this-world returns for investors. Even though bitcoin was a bit more stable in 2021 than in previous years, Visual Capitalist reported that it still produced 59.8% returns compared to the 26.9% returned by the S&P 500.
- More Diversified Portfolio
- Since data from Morningstar had shown that bitcoin has an almost zero correlation to the stock market, many have dubbed it the “digital gold.” Investors have traditionally relied on gold to diversify their portfolio of stocks and bonds due to its near-zero correlation to both markets. Now, bitcoin has shown the same characteristic between 2012 and 2020, leading many to view it as a diversification tool.
It bears stating that recent data is making this case for bitcoin as the digital gold less solid. Nevertheless, investors continue to use bitcoin as a diversification tool. Since other cryptos are new, there has not been significant research on their diversification potentials.
- Since data from Morningstar had shown that bitcoin has an almost zero correlation to the stock market, many have dubbed it the “digital gold.” Investors have traditionally relied on gold to diversify their portfolio of stocks and bonds due to its near-zero correlation to both markets. Now, bitcoin has shown the same characteristic between 2012 and 2020, leading many to view it as a diversification tool.
- Future Potential
- On September 7, 2021, El Salvador set a milestone when it accepted bitcoin as a legal tender. Many crypto enthusiasts believe that a wider acceptance of crypto as means of exchange is imminent. If this belief becomes reality, then the future potential of crypto is enormous.
Consequently, many investors who don’t want to miss out on such potential are considering including cryptocurrencies in their IRAs.
- On September 7, 2021, El Salvador set a milestone when it accepted bitcoin as a legal tender. Many crypto enthusiasts believe that a wider acceptance of crypto as means of exchange is imminent. If this belief becomes reality, then the future potential of crypto is enormous.
What Are the Risks of Bitcoin and Cryptocurrency IRAs?
It is essential to comprehend the risks associated with bitcoin and cryptocurrencies, despite their advantages, to make informed decisions.
- Volatility
- While the prices of cryptos can move up significantly, they can also go down significantly in little time.
Bitcoin reached $1,237.55 on December 4, 2013 and then slumped to $697.02 in just three days, a 44% loss. Similarly, it was at $12,913.28 on June 26, 2019 before falling to $6,635.84 on December 17, 2019.
The same has been proven with the other cryptocurrencies. For example, etherium fell by 40% between mid-November 2021 and January 2022.
- While the prices of cryptos can move up significantly, they can also go down significantly in little time.
- Hype and Scams
- Over the years we have seen many cryptos rise and fall. These cryptos are called dead coins. Coinopsy , a website that keeps a list of these coins, defines dead coins as “cryptocurrencies that have been abandoned, used as scam, their website is down, has no nodes, has wallet issues, doesn’t have social updates, has low volume or developers have walked away from the project.”
Not surprisingly, there are 2,398 entries on the website. Between 800-1000 ICOs (initial coin offerings) failed by 2018 according to a report by The Quartz Index .
At the crypto scam level, Time reported that an estimated $14 billion were lost to crypto scammers in 2021 alone.
This is especially worrying for cryptocurrency and bitcoin IRAs since custodians of self-directed IRAs have no obligation to conduct due diligence on behalf of their clients. If you choose cryptocurrencies, you are solely responsible for protecting yourself from dead coins and other forms of scams.
- Over the years we have seen many cryptos rise and fall. These cryptos are called dead coins. Coinopsy , a website that keeps a list of these coins, defines dead coins as “cryptocurrencies that have been abandoned, used as scam, their website is down, has no nodes, has wallet issues, doesn’t have social updates, has low volume or developers have walked away from the project.”
- High Fees
- Self-directed IRAs are generally expensive, and you can expect to incur an initial setup fee, maintenance fees and custodial fees, among others. Since purchasing cryptocurrencies can be very expensive on its own, these fees can quickly become significant.
- Finding a Custodian
- Not all IRA providers offer self-directed accounts. In addition to the stress of finding a general SDIRA custodian, you must also find one that will allow you to buy cryptocurrencies. The list is smaller and negotiation for better fees may become difficult.
- Prohibited Transactions
- Any transaction you make on your bitcoin IRA or cryptocurrency IRA must not be made to benefit you personally, your descendants or any business you have at least a 50% stake in.
The IRS has full details on prohibited transactions to understand before making any investments.
- Any transaction you make on your bitcoin IRA or cryptocurrency IRA must not be made to benefit you personally, your descendants or any business you have at least a 50% stake in.
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