If you are already wrapped up in the world of cryptocurrencies, there is more than just trading online, and watching the fluctuations of Bitcoin and other cryptos.
Nowadays, you can even invest your Bitcoin for retirement. We know, it sounds mad right? But it is true. Doing this can actually offer you higher returns, and it also adds diversity to your portfolio for retirement.
However, we all know that cryptocurrencies are very volatile, and you always carry risk when you are trading in them. Their volatility is one of the primary downsides of getting into the cryptocurrency game.
Check out this crypto IRA website, and you might see more about what cryptocurrency can do for you in your retirement. Perhaps volatility won’t always be a problem? Okay, that is doubtful we know, but is there a chance that these IRAs can actually help us get a little more stability in our financial retirement portfolios? Have a look.
What Is A Bitcoin IRA?
Before we jump into how it works we will explain what a Bitcoin IRA actually is. Most of us do not know this, and unless you are a tech wizard or already know much about financing and cryptocurrency, you may be a little out of the loop here.
Bitcoin IRA is just another term used for self-directed IRAs. This means that you can invest into your account in alternative classes of assets. Including precious metals such as gold, real estate and of course, cryptocurrencies.
These would otherwise be excluded from typical IRA accounts.
Self-directed IRAs allow many Americans to have the ability to buy a diverse span of alternative assets, it gives you more versatility and diversification in your accounts. In fact, it is actually believed that there is probably around three to five percent of IRAs which invest in alternative assets.
If you decide to invest in Bitcoin for a comfy and more financially lucrative retirement, it is possible that it can actually enhance your returns, while also providing a more broad diversity. However, we won’t cover up the fact that it also carries some risk.
Any volatile asset will carry some risk in your portfolio, it just has to be something that you are prepared to face. Bitcoin will always be volatile, as will any cryptocurrency, as they are not overseen by a bank or institution.
This does not have to be a bad thing though, even in retirement accounts.
How Does It Work?
With this in mind, let us consider the main question here, how it works.
Bitcoin IRAs are not so different from any IRA, they have the same premise as any other IRA, the only real difference is that you invest in cryptocurrency rather than investing in other areas such as mutual fund shares or otherwise.
You do have choices though. You have to make a decision between traditional IRAs or a preferred option of self-directed IRAs, and whichever you choose will have you gain from their specific advantages in tax.
You will have some similar contribution limits each year, likely around $6,000 to $7,000, for over 50s. You can also add funds from other accounts such as a standard IRA, or even your 401(k) passing it into your self-directed IRA plan.
While we know that self-directed IRAs and normal IRAs are very similar, we also note that there are some defined differences in key aspects.
So, instead of getting a typical one-stop experience that a vast majority of brokers will offer, in which you create an IRA, then buy or sell security in one specific place, you do have to be a bit more hands-on with Bitcoin IRA.
There are three pivotal components to this.
First, you get the custodian, which keeps your IRA, therefore is liable for it being safe, as well as ensuring that your account is kept true to regulations that are set by the government and the IRS. In typical financial institutions banks would do this when dealing with the IRS.
Then there is an exchange, who manages the trades of your cryptocurrency. A cryptocurrency exchange is not dissimilar to stock markets. Being an area in which digital currencies are traded, and you purchase your cryptocurrencies.
Finally, there is a secure storage solution, which is in place to protect your cryptocurrency. A majority of providers for Bitcoin IRAs will include proprietary secure storage methods that will ensure all digital currency safe from any attempts at stealing them, once you have purchased them.
A IRA which is self-directed might give you all these above components in any variation.
One Bitcoin IRA may partner up with a specific exchange, or it may also enable you to trade through a third-party exchange. It will vary from provider to provider.
Why Should You Do It?
If you are trying to decide whether or not you should open up a Bitcoin IRA, then you will need to see what the advantages are to doing so.
Bitcoin’s volatility will always have us slightly concerned when juggling it in our financial lives, so we would hope that the benefits are substantial.
Of course, they are.
- The diversification of your IRA is one of the primary advantages of this. Cryptocurrency is considered an asset which is not related with bonds or stocks, which makes up a majority of what we hold in our retirement accounts. It can help you to safeguard your retirement balance, in spite of cryptos being volatile.
- There is also a potential for getting a high return. Bitcoin may be volatile, however, with this comes a possibility for some colossal gains. Bitcoin was around $5,200 in worth in March 2020, however, it ended 2020 nearly at $30,000, so while it can swing low, it can also swing high too.
- Let’s not forget the tax advantages as well. Probably one of the biggest issues for a majority of investors of Bitcoin is tracking their trades and considering what taxes are owed.
You owe tax every time you sell cryptos for a profit, and is an absolute nightmare to keep track of all the financial aspects and gains you make. A Bitcoin IRA can alleviate this burden as you are not taxed, so long as the finances and assets are kept securely in your account.
You will also benefit a lot from the growth in value you do not lose to tax.
Are There Any Downsides?
Where there are advantages, there are also disadvantages too.
- You will face costs. Unlike you would have with a standard IRA, which will allow you to invest for free. However, there is the issue that self-directed IRAs will come with higher costs. From the cost of setting-up your accounts, even trading and management costs. You should always be aware of these costs before you invest.
- Limitations are also a downside. There are Bitcoin IRA companies who will also only allow you trading on related currency exchanges. Some others will let you pick and choose which your favored exchange is. If you have specific exchanges you like to use, you should ensure they allow it.
- Volatility is also an issue you should be prepared to face, although we have already discussed it, and anyone who has traded in cryptos will be aware of. Its worth can fluctuate up and down like ocean tides.
- It is complex. Not only are the moving aspects with custodians, as well as exchanges and so on, complex. But you will likely need to run another retirement account should you decide to invest in Bitcoin IRA.