Cryptocurrencies have remained a hot topic in the financial world for the last few years.
From Bitcoin’s unrelenting rise and then fall in price during 2017 to the blockchain technology that is the foundation for these digital currencies, cryptocurrencies continue to spur intense debate about their use and prominence in the future of money and digital transactions.
Besides general price speculation, investors are flocking towards Bitcoin and other cryptocurrencies as long-term options and adding them to their retirement plans.
Is this trend something worth considering? Is it reasonable to add Bitcoin and other cryptocurrencies to your retirement portfolio?
These are a couple of the questions we will look at an answer in this article.
But first, let’s review what cryptocurrency is and how it works.
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What is Cryptocurrency?
First and foremost, what actually is a cryptocurrency and how does it differ from blockchain technology and Bitcoin?
By definition, cryptocurrency is a digital currency - or medium of exchange like the US Dollar or Euro - that uses encryption technology to control the creation of its units and verify the transfer of funds.
Cryptocurrencies are also independent of a central bank. This means no single country or individual has control over its value.
Cryptocurrencies, by definition, have no paper bills or physical existence. They are digital units underlined by blockchain technology.
Blockchain is a decentralized ledger of all transactions across a peer-to-peer network. The technology allows digital information to be distributed, but not copied. ]That means each individual piece of data can only have one owner.
Beyond cryptocurrencies, potential applications of blockchain include its use in the banking industry, healthcare, voting, and many others.
It’s an underlying tracking and encryption technology that is accurate and transparent.
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Bitcoin (and Other Cryptocurrencies)
Bitcoin is a type of cryptocurrency. Created in 2009, it is the original cryptocurrency which blockchain was invented for and is also the most well-known.
Since then, other forms of cryptocurrency have been created such as Litecoin, Ethereum, and Ripple.
Bitcoin is easily the biggest and most valuable cryptocurrency in the world with a market capitalization of over $130 Billion as of this writing.
The next largest cryptocurrency is Ethereum with a market cap of approximately $25 Billion.
What is a Cryptocurrency IRA?
A Bitcoin or cryptocurrency IRA is a self-directed IRA that holds investments in cryptocurrency. The key here is that the type of account is a self-directed IRA.
Self-directed IRAs differ from a Traditional IRA in that they allow you to invest in alternatives such as land, developed real estate, precious metals, a private business, or even a farm.
The IRS does not allow these forms of alternative investments in a Traditional IRA, and this includes cryptocurrencies.
To open a self-directed IRA, you will have to find a custodian who offers one. However, most household brokerage firms do not typically offer these kinds of services.
Instead, custodians of IRAs are typically companies that specialize in them.
Technically you could open one without a custodian. However, because of the complexity and extra administrative burden of self-directed IRAs, it’s highly recommended you use a trusted custodian for your cryptocurrency IRA.Here at RetirementInvestments.com, we like Regal Wallet because of their top-notch security, insurance against theft, and cold-storage of your crypto coins (more on this later).
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Why Add Cryptocurrencies to Your IRA?
We now understand what cryptocurrency is and how a cryptocurrency IRA is different from a traditional IRA, which leads us to one more important question:
Why would you want to add cryptocurrencies to your IRA?
The answer is surprisingly similar to any other sort of investment you would make in a retirement portfolio.
You would want to add cryptocurrencies to your IRA for portfolio diversification and long-term appreciation.
Let’s explore these two reasons.
Diversification is the number 1 reason to consider adding cryptocurrencies to your IRA.
A recent study by Yale economics professor Aleh Tsyvinski found that the optimal investment portfolio would contain an investment of at least 6% in Bitcoin.
He also found that even those who are less enthusiastic about cryptocurrencies should hold at least 4% of their investments in Bitcoin.
Impressively, he even recommends that those who want nothing to do with Bitcoin should hold a minimum of 1% of it in their portfolio simply for diversification purposes.
His study examined Bitcoin, Ethereum, and Ripple using the Sharpe ratio (an investment ratio that measures return versus risk) and found that these three cryptocurrencies enjoy a higher potential return versus similar assets despite some of the added risks of higher volatility.
Because his study examined only three of the largest cryptocurrencies, it’s not indicative of the entire industry.
That said, for the purpose of adding cryptocurrencies to your IRA, you’d likely want to stick with the most established cryptocurrencies anyway.
Despite the tendency for cryptocurrencies to be relatively volatile over shorter periods of time (think weeks to months time frame), the long-term view for Bitcoin and other cryptocurrencies is generally bullish.
In fact, it’s volatility is actually an argument for a long-term approach to the currency and adding it to a retirement account.
When money is put into a retirement account, it automatically becomes a long-term investment. Investors need to weather volatility in their retirement accounts in order to achieve the long-term growth that they are all after.
It’s why stocks are so heavily recommended in an investment portfolio. They come with higher risk, but also higher reward.
Cryptocurrency is similar. Adding cryptocurrency to a regular brokerage account may give some investors anxiety when the price swings. People are emotional and do not like to see losses.
This is called loss aversion, a cognitive physiological and decision theory that refers to peoples tendencies to prefer avoiding losses to acquiring equivalent gains.
An investment in cryptocurrency is not nearly as safe as an investment in U.S. Treasury bonds, but the long-term potential value of Bitcoin and other cryptocurrencies is categorically higher.
Is Cryptocurrency Safe?
We can’t talk about cryptocurrency without talking about the safety of it. When we think about the safety of cryptocurrency we will look at two things:
- The security of the Blockchain technology that underlies all cryptocurrency
- The way in which cryptocurrency is bought via exchange or investment custodian
For the sake of this review, we will focus on Bitcoin. Cryptocurrencies predominately mimic the way that Bitcoin is set up, but they are not 100% the same.
We will use Bitcoin as an example since it is the most popular cryptocurrency in the world.
Recall cryptocurrencies are supported and made possible by the blockchain. And, inherently, blockchain is an extremely secure technology.
This security is one of the primary reasons that blockchain is considered a revolutionary technology with the potential to dramatically reshape the world.
According to Andrew Gazdecki, founder and CEO of Altcoin.io, blockchain is designed to be immutable, tamperproof, and democratic.
He explains that It achieves this through three defining characteristics:
Decentralization of the blockchain works by sharing everything with every user of the blockchain.
There is no single person who owns the entirety of it and must give permission for transactions to occur.
When transactions occur they are automatically validated across the network and a new “block” is added to the chain.
This kind of decentralization provides a singular version of the truth and ensures there is no single point of failure within the system.
Cryptography is math that takes place within the blockchain to hide the true identity of any one block.
It’s like a password but on steroids. It’s a form of complex mathematical processes that encrypt the blockchain data and protect it from outside intrusion.
Consensus is the process by which the network validates when blocks are added to the blockchain.
In order for a block to be created, the entire network must validate that the action occurring is truthful.
While nothing is 100% secure, blockchain is regarded as one of the strongest and hack-proof technologies in the world.
Cryptocurrency Exchanges and Custodians
Cryptocurrency has a monetary value, which makes it a natural target for hackers and theft.
Hackers are not breaking the blockchain, but rather going after the “coins” or units of cryptocurrency by hacking crypto-mining organizations and vulnerable exchanges.
There have been a few high profile attacks on these exchanges with hackers getting away will millions of dollars. This is the dark and unfortunate side of the cryptocurrency world.
Cryptocurrencies have generated a massive amount of market value in the last decade which has led to the rise of many different cryptocurrency exchanges and investment custodians.
While the underlying blockchain was designed to be extremely secure, not all exchanges are taking the same or necessary precautions when setting up.
This makes it critical that you review and understand who you are investing with. Especially as someone who is interested in adding Bitcoin or other cryptocurrencies to your retirement plan via an IRA.
Onto the Finer Details of a Cryptocurrency IRA
Before we move on let’s quickly recap what we have covered:
- What cryptocurrency (and blockchain) is
- What a cryptocurrency IRA is and how it is different from a traditional IRA
- Why you would add cryptocurrency to your IRA
- The digital security, or safety, of cryptocurrency and blockchain technology
In the next few sections, we will get into the finer details of a Bitcoin or Cryptocurrency IRA. We’ll answer questions like:
- How do I set up a self-directed IRA?
- Should I manage it myself or have a company do it for me?
- If I have a company do it for me, which one should I use?
- Why would I use them?
- What are the overall pros and cons of investing in cryptocurrency?
And more. Self-directed IRAs take a bit more effort up front than a traditional IRA, so we are aiming to make the process simple by answering some of the basic and most-asked questions.
How Do I Set Up a Self-Directed IRA?
When you go to set up a self-directed IRA, you will need to find a financial institution that offers one. This could be a bank, insurance company, or brokerage firm.
But, since we are specifically looking at setting up a self-directed IRA for Cryptocurrency, you need to find an institution that offers investments in crypto.
Many traditional firms do not offer investments in cryptocurrency.
Because of this gap in the marketplace, other businesses were started or pivoted to include cryptocurrency to capture the growing desire of investors to add cryptocurrency to their retirement plan.
Two of the industries biggest are Bitcoin IRA and Regal Wallet. They both offer cryptocurrency IRAs and allow you to invest in a broad range of cryptocurrency.
Reaching out and setting up an account with either of these (or similar) companies will take care of the “set up” portion of a self-directed IRA.
Should I use a Managed or Self-Trade IRA?
I mentioned Bitcoin IRA and Regal Wallet already, and while they both offer cryptocurrency IRAs, they go about them in a distinct way.
Bitcoin IRA is a self-trade IRA, or IRA that lets you day trade cryptocurrency. Regal Wallet offers a managed IRA, where you work with brokers to make trades for you.
The difference is that with Bitcoin IRA you can make trades at any point during the day.
This sounds good in theory due to the control, but would you day trade in your other retirement accounts? Probably not.
Remember, this is a retirement account, not a day trading account.
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Best Crypto IRA Company (#1 Rated)
I mentioned above how we like Regal Wallet as the go-to cryptocurrency IRA provider, and here are the reasons why:
Top ratings from industry watchdogs
The Better Business Bureau (BBB) gave Regal Wallet a top rating of A+, Forbes lists them as the #20 company in the United States, and they have over 1,000 positive reviews on TrustLink.
When looking for a company to do business with, it is always reassuring to know that industry professionals and regular investors agree that the business is worth working with.
They support all major cryptocurrencies
They support Bitcoin, Ethereum, Litecoin, and Ripple, giving investors plenty of options to invest in the most established cryptocurrencies on the market.
Supporting the major cryptocurrencies is a nice-to-have feature that not many crypto IRAs offer.
It allows the investor to do their research and then diversify within the cryptocurrency space if they want to.
They store your coins in “Cold Storage”
Cold storage is when your coins are taken off of the internet and stored in a literal safe. This makes them hack-proof. By eliminating the connection with the internet, your coins become unreachable to would-be hackers.
Recall the security discussion above. Most cryptocurrency theft happens when hackers steal coins from companies. They aren’t breaking the blockchain, they are hacking the companies that store people’s coins on their servers.But even the most secure servers can sometimes be compromised. So by taking your coins off of the internet, off of the servers and physically storing them in a safe, Regal Wallet eliminates the ability for hackers to steal your coins.
Pros & Cons
- Massive potential for returns
- Cryptocurrency isn’t going away anytime soon
- Can be very volatile
- No one knows what the future holds
How to Setup a Cryptocurrency IRA
After researching and reviewing all of the major cryptocurrency IRA companies and custodians for several years, Regal Wallet checks all of the boxes when it comes to trustworthiness, customer reviews, management fees, and storage options.
Their 4 step process is super simple to get setup.
Within 24 hours a Regal IRA™ associate will get in touch with you to help guide you through the process of moving your funds and to ask for any additional information if needed.
Regal will work with your custodian to transfer funds from any of your existing accounts into your newly formed Regal IRA™ Account.
As soon as the funds are received, Regal will fulfill your order based on the type of metals or cryptos you are interested in!
Are You Ready to Add Bitcoin or Other Cryptocurrencies to Your Retirement Plan?
Jacob holds a bachelors degree in finance and has spent his professional career crunching numbers and mastering spreadsheets in the corporate world. He moonlights as a fantasy football commissioner, back-yard bbq amateur, and freelance writer/money blogger.