Have you considered investing your money through a Bitcoin IRA? What are the pros and cons that you have identified so far? In this review, I will be taking you through the very outstanding advantages and disadvantages of Bitcoin IRAs, with the hope that I will help you make a more informed decision. Let us get right into it without further ado.
What is Bitcoin?
Bitcoin, abbreviated as BTC, is the most valued cryptocurrency in the world. It a digital currency whose transactions happen through a peer-to-peer network, known as a blockchain. With such transactions, there is usually no need for the inclusion of a third-party financial institution.
You can obtain bitcoin through purchasing it, trading it or even mining it. Once you have acquired the Bitcoin, you should consider storing it safely in a Bitcoin Wallet. Cold storage (the equivalent of a vault in which you store gold or other valuables), is recommended for the long-term storage of cryptos. This method keeps your Bitcoin safe from hackers and physical theft.
The utility of Bitcoin is gradually growing in the current world, which is something that is expected to lead to its increased value. Back in 2013, for instance, there were only 45,000 Bitcoin transactions being done on a daily basis. By 2018, this number had risen to more than 300,000. With increased access to knowledge about Bitcoin, more people are expected to rely on them to pay for goods and services as time goes by.
What is a Bitcoin IRA?
An IRA is simply an individual retirement account that allows individuals to set aside money for retirement, in a manner that profits them and has some benefits- such as tax benefits. A Bitcoin IRA is, therefore, an IRA in which investors have the opportunity to diversify their retirement investment portfolio by including cryptocurrencies.
Whereas the concept of Bitcoin IRAs is quite new to most traditional investors, the concept of Self-Directed IRAs is one that has been in existence for quite some time now. SDIRAs have been around since 1974, and they usually allow investors to invest in both traditional and non-traditional assets, such as digital currencies.
Bitcoin IRAs are usually SDIRAs. An investor has the power to control the purchase of crypto assets, as well as their liquidation. With SDIRAs, there are no delays that arise from third-party validation, thus investors can promptly invest in certain assets, and even liquidate their positions as fast as they would want to.
How does a Bitcoin IRA Work?
A Bitcoin IRA is a unique self-directed IRA that lets you earn investment income through investing in cryptocurrencies for the long-term. As you can see, the main difference there is between a regular SDIRA and a Bitcoin IRA is the underlying assets. The risk-profile of Bitcoin is also way higher than other traditional assets, but it also presents greater rewards in terms of very high returns.
One thing you should know about Bitcoin IRAs is that they are more expensive to have. You are expected to pay higher fees since the risk involved is higher. Unlike traditional assets, you have to pay for the cold storage facility, which is meant to keep your Bitcoin safe from any type of loss.
The Pros and Cons of Bitcoin IRAs
- They present you with significant tax benefits. Under Section 1256, it is stated that the investor will have 60% of their investment income taxed at long-term capital gains rates, whereas the remainder ( 40%) will be taxed at short-term gains rates. Such tax benefits ensure that you take home a larger chunk of your investment income, in comparison to other investors relying on other types of IRAs.
- Bitcoin is a global asset. An investor can, therefore, invest through any firm on a multinational scale, so long as it allowed by the law.
- Bitcoin has a very huge potential for growth.
- Having Bitcoin in your portfolio helps with diversification. As much as Bitcoin is a risky asset, having it as an asset in your portfolio can help realize higher returns (if its value skyrockets), when the value of other assets is plummeting.
- You can expect to be charged higher fees for all Bitcoin IRAs. As stated earlier on, custodians bear a higher risk by holding cryptos for investors in cold storage, in comparison to holding other traditional assets.
- Bitcoin is extremely volatile.
I hope that you enjoyed this article about the pros and cons of a Bitcoin IRA, and that you are in a better position to make a more informed decision. Feel free to express your thoughts in the comments section, and to also drop a question if you have any.
I wish you success!
Eric, investor, entrepreneur and team member of Gold Retired.