While the coronavirus outbreak has continued to uproot traditional stocks and assets, Bitcoin (BTC) and other cryptocurrencies have only proven their resilience during these unpredictable times.
Investors are taking advantage of this seemingly resilient nature of BTC and other cryptocurrencies while fluctuations in the global economy are affecting traditional stocks.
Since the beginning of the coronavirus pandemic, more than half of U.S. investors (55%) are inclined to start investing in BTC. This would roughly translate to a potential U.S. market of 32 million Bitcoin Investor Households.
While BTC investments have increased by 83% since the beginning of the year, investors are still reluctant to include cryptocurrencies in their retirement plans due to the apparent volatility and erratic price swings of digital assets.
Though this is the case, several financial services are now seriously looking into cryptocurrencies as the ideal investment for retirement through self-directed Individual Retirement Accounts (IRAs). This is due to the apparent volatility and erratic price swings.
Since 2016, Bitcoin IRA– the trailblazing platform that allows the purchase of digital assets into their retirement accounts– has processed a staggering $400M in cryptocurrency transactions and has opened over 50,000 consumer accounts.
Considering the potential risk of cryptocurrencies and the sensitivity of retirement accounts, let’s dive deep into the real question: Should you be investing your money in Bitcoin IRA?
What is Bitcoin IRA?
In simple terms, Bitcoin IRAs allow investment in digital assets (cryptocurrencies) using retirement savings. These types of IRAs are self-directed retirement accounts offered by financial services in the U.S.
Bitcoin IRAs allow investors to diversify their retirement funds through a wide range of asset classes–from alternative assets such as gold, real estate, and cryptocurrencies to traditional stocks and bonds.
A Tool for Diversification
More than anything, cryptocurrency provides diversification to an investment portfolio.
Cryptocurrencies, unlike other diversification tools, are highly asymmetrical investments. This means that the potential for reward or upside potential is much higher than the downside risk. This makes cryptocurrency a highly attractive option for risk-tolerant investors looking to invest a portion of their portfolio to a high growth asset.
No Relation to Third-Party Organizations
All cryptocurrency transactions are controlled personally by buyers and sellers. This means that cryptocurrency values cannot be controlled by third party organizations and the government.
This makes cryptocurrencies highly resilient from social and economic instability and unrest.
Resilient to Economic Fluctuations
Since the initial dip in the global economy at the height of the COVID-19 pandemic in March, the Bitcoin value increased by 40% and has been found to have outperformed a significant number of global assets.
While Bitcoin prices dropped in March, it quickly bounced back faster than other traditional stocks and assets. A report by Coinshare emphasized that Bitcoin markets are highly resilient and self-correcting.
In a stress-test report by JPMorgan, BTC proved to be a viable long- term investment class.
As the coronavirus situation continues and businesses are forced to implement further restrictions, investors believe that Bitcoin is expected to see a bull run. It is noted to be increasingly correlated to the performance of the U.S. equities market.
As continued cryptocurrency price volatility continues to make headlines, cryptocurrencies are now ultimately associated with only a long-term growth potential. These investments would best be made by long-term investors who can ride out the significant price fluctuations.
Security and Privacy Regulations
As the cryptocurrency industry gains further market, The Office of the Comptroller of the Currency (OCC) and Securities and Exchange Commission (SEC) expressed its willingness to provide policy development and regulatory clarity to investors of cryptocurrencies, particularly stablecoin reserves. This is to provide cryptocurrency inventors some security from price volatility.
Bitcoin IRAs offer significant tax benefits.
Once you’ve set up a self-directed IRA, it is possible to maximize your retirement benefits by utilizing your tax-deferred returns. This means having a choice between trading bitcoins or saving it up for a long-term investment.
Under Section 1256, capital assets are taxed at 60 percent long-term and 40 short-term for capital gain or loss, regardless of the taxpayer’s holding period.
Unlike most transactions that require chargebacks from middlemen, Bitcoin is completely decentralized. This makes it easier to verify all transactions since each fund transfer is only given the go signal after your permission.
A Quick Word of Caution about Bitcoin IRAs
Remember that Bitcoin IRA accounts are still undergoing development, and making this investment comes with an apparent risk.
Setting up your Bitcoin IRA may be done through two approaches:
You may opt to pursue a do-it-yourself approach when setting- up your Bitcoin IRA.
Only investors with significant background knowledge on cryptocurrencies, self-directed IRAs, and IRS regulations should pursue this option.
Partnering up with a professional company to set- up your Bitcoin IRA is recommended, especially for long-term investments.
Aside from price volatility and the erratic price movements, extra precautions should be taken concerning the following:
Cybertheft and Fraud
Setting up your own Bitcoin IRA account will put you at a greater risk of cybertheft and hacking. Professional companies may provide you with additional security from theft, fraud, and hacking.
Remember to go with a company that is fully-insured with each deposit.
Fees concerning establishing and maintaining your account can significantly balloon. You should keep in mind the additional charges linked to opening an account, monthly or annual maintaining fees, purchasing assets, and fund transfers.
Additional charges concerning security and custody requirements should also be kept in mind.
Unpredictable and Speculative Investment
Cryptocurrencies are still considered to be an extremely volatile investment. These wide price swings make cryptocurrency investment a risky option for something as sensitive as retirement savings.
Enter at Your Own Risk
Many of the pitfalls can be successfully avoided by carefully doing your research on reliable bitcoin IRA providers.
It is essential to look for companies with strict cold storage protocols and full insurance policies to protect your investments from fraud, cybertheft, and hacking. Make sure that your IRA provider supports full insurance with every deposit.
Remember to always keep a well-diversified investment portfolio that specifically caters to your situation and financial goals:
- Short-term vs. Long-term Investors
Given the volatility of the cryptocurrency market, short-term investors (5 years or less) would best steer clear of this as a retirement investment.
An unexpected dip in price movements could ultimately delay your retirement and cost a considerable portion of your savings.
- Low-risk vs. High-risk Investors
Investors who can confidently allocate a small portion of their assets to a high-risk/high-reward should consider investing in Bitcoin IRA.
These accounts should only be handled by investors who can confidently afford to lose some of their finances should the asset take an unexpected dip in price movement.
Handling a Bitcoin IRA account would involve careful planning and research. Considerations based on security, compliance, and IRS-compliant transactions should be of greatest concern.