With the recent rise in popularity and price of cryptocurrencies, many people are still trying to figure out how to efficiently invest in the new digital asset class. While would be investors are waiting for the SEC to hopefully grant approval for the creation of crypto ETFs, which would allow for direct exposure of retirement funds into crypto markets, investors are currently limited to open market options such as Grayscale’s private trust that trades directly on the US stock market. These private trust funds allow investors an indirect way to gain exposure to the underlying cryptocurrency. However, there may be a better way for investors to use their retirement funds to invest directly in cryptocurrencies through what is referred to as bitcoin IRAs. Bitcoin IRAs are basically just an individual retirement account that allow for direct access to Bitcoin or other digital currencies within the retirement account.

The terms “bitcoin IRA” and “cryptocurrency IRA” are being used interchangeably, like “Kleenex” is to “tissues”, but refer to the same concept of setting up self-directed individual retirement accounts (SDIRAs) to invest directly in the underlying cryptocurrencies. SDIRAs are not a new concept and have allowed Americans using their retirement accounts to invest in many different asset classes such as gold, real estate, private equity, and more. Due to the volatile and speculative nature of cryptocurrencies, most custodians and trustees have not authorized direct investment within their platforms. However, there are a multitude of companies that will allow you to create a cryptocurrency IRA that can invest directly into these digital asset classes.

The first and largest of these companies being Bitcoin IRA, but also include companies that have been working with SDIRAs for over 40 years like Equity Trust Company. These companies, including Bitcoin IRA, offer most of the largest cryptocurrencies including Bitcoin, Ethereum, Ripple, and Litecoin, but the types of crypto curries vary by provider. There are a multitude of other factors that should come into play when deciding which of these companies to use including security, fee structure, expertise, web experience, and more.

There are several advantages to setting up a cryptocurrency IRA which include diversification to an asset class that is not correlated with stocks and bonds, the potential for higher returns in the booming digital asset class sector, and the tax advantage of not having the headache of calculating your taxes owed after every trade you make because you will not be taxed as long as the money and securities remain in your account. 

The freedom of SDIRAs can be a double-edged sword, so keep in mind that they are called self-directed for a reason. You will be on your own for determining the legitimacy, appropriateness, and suitability of your own investments. This can be a very high hurdle for novice investors or people working to wrap their heads around the highly technical digital asset classes. 

While retirement accounts are usually meant for secure long term investments that will appreciate in value over time, cryptocurrency IRAs give investors the ability to rollover a small portion of their accounts to these SDIRAs to gain additional diversification. It is not recommended that investors use their retirement funds for speculation, and typically should allocate less than 5% of their accounts to an alternative asset class. Bitcoin and other cryptocurrencies are extremely volatile and should make up only a very, very small portion of your total investments.  As always, consult a tax and/or investment professional before making these important decisions.

 


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