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Guide to Bitcoin IRA: Pros, Cons, and What to Know

December 07, 2020 · 5 minute read

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Guide to Bitcoin IRA: Pros, Cons, and What to Know

A bitcoin IRA (individual retirement account) is a self-guided retirement account that holds bitcoin in its portfolio. Typically, most IRAs invest in stocks, bonds, or precious metals. A bitcoin IRA invests in bitcoin, and perhaps several different types of cryptocurrency. There is no official designation for a bitcoin IRA or bitcoin Roth IRA by the IRS or any other regulatory agency—the term “bitcoin IRA” simply refers to an IRA that includes bitcoin.

Pros of a Bitcoin IRA

A cryptocurrency IRA could provide some unique benefits, including offering overall portfolio diversification, and potentially unheard of price appreciation.

Diversification

Bitcoin provides a unique way to diversify an individual’s overall investment portfolio.

Given bitcoin’s extreme outperformance of all other asset classes over the last ten years, it’s often said that bitcoin is “uncorrelated” with the rest of the investment world. While that trend was upended in early 2020 as Bitcoin experienced a positive correlation with the S&P 500, some investors still consider it a more volatile investment.

Price Appreciation

Given the unparalleled price appreciation bitcoin has enjoyed to date, along with the fact that cryptocurrency is an uncorrelated asset class and exists outside the control of any single centralized authority, some investors have wondered if it could be a reasonable retirement option.

There have been periods when bitcoin traded in tandem with stocks, but from 2009 to 2020, bitcoin has had over a 1,000,000% price increase (from less than $0.01 to more than $10,000). By comparison, the S&P 500 index provides an average return of 8% annually. That said, past performance is never a guarantee of future returns.

Cons of a Bitcoin IRA

There are also potential drawbacks to holding investments in a bitcoin IRA, including both volatility and fees.

Volatility

Bitcoin has shown extreme volatility at times. This is one of the main reasons the asset class is considered risky by some, although this perception has begun to change recently.

The list of large corporations (like PayPal, Square, and MicroStrategy) and self-made billionaires announcing large investments in bitcoin continues to grow. Successful billionaire investors like Paul Tudor Jones and Stanley Druckenmiller believe that bitcoin’s overall value proposition outweighs its volatility.

Still, for investors with low risk tolerance, volatility could be a big drawback. Seeing investment funds fall by ten or twenty percent (or more) in a single day can be too much for some people.

Fees

Perhaps the biggest and most assured drawback of investing in a bitcoin IRA would be the fees involved.

Setting up an account alone could cost thousands. Every trade engaged in on an investor’s behalf could also come with fees in excess of 1% per trade.

And as with other IRAs, withdrawing funds before retirement results in additional fees and taxes.

Taken together, the final taxes and fees could eat into a portion of the profits and tax advantages earned by a bitcoin IRA.

How to Invest in a Bitcoin IRA

The main way to invest in a bitcoin IRA is to use a trusted service provider that helps investors establish IRAs that hold bitcoin.

There are some companies that have partnered with bitcoin custodial services like BitGo, for example, to help safeguard funds for investors—although these companies cannot guarantee against loss. The specific process for starting a bitcoin IRA might vary according to which provider an individual chooses.

A bitcoin IRA provider can help investors buy cryptocurrency to add to their portfolio while also safeguarding the funds for them.

How does a bitcoin IRA work?

A cryptocurrency IRA works much like any other IRA. It’s a retirement account that invests in bitcoin. The main difference for most customers is they will likely be interacting with three different entities:

1. Bitcoin IRA Service Providers: These are the companies an individual will deal with when they want to add bitcoin to their IRA. They are the financial rails through which assets will be converted into bitcoin.

2. Self-Directed IRA Custodians: These are usually banks, credit unions, or brokerages that hold the assets in an IRA. Traditional IRAs invest in stocks and bonds, but self-directed IRAs allow investors to hold other assets like gold, real estate, or cryptocurrency.

3. Custody or Wallet Providers: Typically, a bitcoin IRA service will have a partnership established with a trusted wallet provider or custody solution that securely holds the private keys to a customer’s bitcoin funds.

Can you invest a 401(k) in bitcoin?

The answer to this question is “maybe, but probably not.”

401(k) plans generally don’t allow for the direct purchase of cryptocurrency. There are potential ways to roll over a portion of 401(k) funds into bitcoin, but the easiest way might still be to use a self-directed IRA.

Is a Bitcoin IRA Account Safe?

The answer to this question depends on how a bitcoin IRA company stores the private keys to an investor’s crypto.
It is widely acknowledged that to be truly safe, keys must be held off-line in cold storage and secured using some kind of multi-signature (multi-sig for short) method. This means that the funds can’t be accessed by any hacker on the internet, and that multiple access methods are required to retrieve any funds.

Multi-sig works kind of like a safety deposit box, where there are two physical keys—one held by the bank and one held by the customer.

Multi-signature security means that there must be at least two means of user verification before funds can be accessed. A basic example would be a customer having to answer emails from two separate email accounts. More complicated methods might involve some kind of photo or voice identification in addition to multiple emails and an additional key held by the custodian of the funds.

Is Bitcoin Investing Safe?

As far as investment gains or losses are concerned, investors will have to decide for themselves whether or not long-term bitcoin investing is safe in terms of their comfort level and their goals. The technology is only 11 years old at the time of writing.

There’s always a chance, however slim, that the project could fail. That said, the prospect of incredible returns seems to sway more and more investors.

Since 2009, the price of one bitcoin in US dollar terms has risen well over 1,000,000%, making bitcoin the best performing asset of the decade—and in history.

While past performance is never a guarantee of future outcomes, if this trend were to continue, it could potentially mean substantial returns for investors over the long-term.

The Takeaway

A bitcoin IRA or bitcoin Roth IRA is an individual retirement account that holds bitcoin. Instead of a traditional IRA that holds stocks and bonds, a bitcoin IRA is a self-directed IRA that can hold a variety of assets like gold, real estate, or bitcoin.

In recent years, several service providers have stepped in to fill the market need for people wanting to add bitcoin to their retirement accounts. While the process is relatively straightforward, one of the major drawbacks that might turn many investors off could be the potential high fees involved.

For investors ready to wade into the cryptocurrency market, SoFi Invest® can help you get started buying Bitcoin and other cryptocurrency today.

Find out how SoFi Invest can help you meet your investment and retirement goals.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

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