Analysis: Should You Get a Bitcoin IRA?
Imagine turning your retirement nest egg to Bitcoin. By adding a Bitcoin IRA to their investment portfolio, that’s what many people are doing, literally. The rise of Bitcoin to its current price of $668, sitting at close to 2016 highs, had many people taking a serious look at the popular digital currency. But is this the right move for you?
A Bitcoin IRA is a type of IRA that allows the investor to own Bitcoin, instead of paper-based assets such as cash, stocks and bonds. It is similar to the Gold IRA that was created by Congress in 1997, says Edmund C. Moy, chief strategist for Bitcoin IRA and former United States Mint director, who oversaw the largest production of gold and silver coins in the world.
To qualify as Bitcoin that can be held in an IRA, certain criteria are required. “The Bitcoin must be held by the IRA trustee instead of the IRA owner. The Bitcoin must be stored in an IRS-approved depository,” says Moy. Mainstream investors don’t want to actually store Bitcoin themselves, as security is quite complex.
“All other rules about IRA contributions, disbursements and taxes apply,” Moy adds.
Bitcoin IRAs appeal to investors who want a diversified retirement portfolio.
Traditional and Roth IRAs invested in stocks or mutual funds are vulnerable to inflation. “Because Bitcoin prices generally move in the opposite direction of paper assets, adding a Bitcoin IRA to a retirement portfolio provides an insurance policy against inflation,” says Moy. “This balanced approach smooths out risk, especially over the long term, which makes it a smart choice for retirement investments like IRAs.”
A Growing Trend
Moy says there is going to be a bit of a learning curve towards Bitcoin IRAs because they involve a very complicated transaction that only the most persistent investor was willing to pursue. “You must find a trustee or custodian for the IRA along with an approved depository. Then, you need to buy the approved Bitcoin and have it transferred to the depository in a way the custodian can account for it,” he explains.
Because of the financial crisis of 2008 and the resulting Great Recession, Bitcoin IRAs are starting to become significantly more popular. BitGo, a leading Bitcoin wallet provider and experts in security have partnered with Bitcoin IRA to simplify the transaction have made investing in a Bitcoin IRA a one-stop shop for a Bitcoin IRA. Result: robust Bitcoin IRA growth.
Then, of course, there’s the impact of economic and world news. “Strong interest in Bitcoin IRAs has continued because of the potential inflationary impact of the Federal Reserve’s stimulus programs and a sharp increase in geopolitical risk,” says Moy.
Finding a Reliable Broker/Custodian
To put IRA funds into Bitcoin, you have to establish a self-directed IRA, a kind of IRA that the investor manages and can be invested in a wider range of products than other types. For a Bitcoin IRA you need a broker (to buy the Bitcoin) and a custodian to create and administer the account. This company will store or hold your actual Bitcoin, says Chris Kline, Chief Operating Officer of Bitcoin IRA, headquartered in Sherman Oaks, California.
Custodians are usually banks, trust companies, credit unions, brokerage firms or savings and loan associations that have been approved by Federal and/or state agencies to provide asset-custody services to individual investors and financial advisors.
Bitcoin’s Special Risks
All investments come with risks and rewards, Bitcoin IRAs included. “In many ways, Bitcoin IRAs have the same risks that any investment has,” says Moy. “The price of Bitcoin can go up or down and have volatility. No one can accurately predict its future.”
But despite the risk, Moy says there is a reason to invest some of your retirement funds in Bitcoin. “Bitcoin may have a short historical track record of being a store of value, but its innovative algorithm and decentralized nature makes it a great asset to hold in any portfolio. Stocks can go to zero as we’ve seen with Lehman Brothers, bonds can default like in Argentina or get big haircuts like in Greece. The value of the dollar has steadily gone down” says Moy.
But there are also some risks specific to investing in physical Bitcoin.
Bitcoin is subject to security risks associated with the private and public keys that control and store it. Those with little experience in Bitcoin should either use a company that stores Bitcoin using the latest multi-sig security or spend the time to learn about security. However, to qualify for Bitcoin IRAs, depositories are required to be insured, which would protect your investment as long as your account doesn’t exceed the custodian’s stated value.
The Bottom Line
Bitcoin IRAs are normally defined as “alternative investments,” which means they are not traded on a public exchange and require special expertise to value. While Bitcoin has the potential of a high return, it’s easy to be blinded by its recent growth in price. Bitcoin can be volatile.
If you’re considering a Bitcoin IRA, consult a Bitcoin IRA advisor to determine how Bitcoin would fit with the overall goals of your portfolio. And request a free Bitcoin IRA Rollover Guide for more information.