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

By Melanie Mannarino · January 28, 2022 · 6 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, mutual funds, and ETFs. A Bitcoin IRA invests in Bitcoin, and perhaps several different types of cryptocurrency.

What is a Bitcoin IRA

The term “Bitcoin IRA” simply refers to an IRA that includes Bitcoin. There is no official designation for a Bitcoin IRA or Bitcoin Roth IRA by the IRS or any other regulatory agency.

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 may be banks, trust companies, or any other entity approved by the Internal Revenue Service (IRS) to act as an IRA custodian. Traditional IRAs invest in stocks and bonds, but self-directed IRAs may allow alternative assets such as real estate, promissory notes, tax lien certificates, 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.”

Until recently, 401(k) plans didn’t allow for the direct purchase of cryptocurrency. But some companies, like ForUsAll, BitWage, and Digital Asset Investment Management are starting to offer Bitcoin and other cryptocurrencies in 401(k) plans. Of course, since 401(k) plans are employer-sponsored, interested investors may be limited by what their particular company offers in terms of options. A self-employed individual seeking out a solo 401(k) may find they have more options.

There are other potential ways to roll over a portion of your 401(k) plan into Bitcoin, but the easiest way might be to use a traditional IRA.

Pros and Cons of Using a Bitcoin IRA

There are plus sides and down sides to including Bitcoin in your IRA planning. Here are some major points worth noting.

Pros of a Bitcoin IRA

A cryptocurrency IRA could provide some unique benefits, including offering overall portfolio diversification, and potentially large 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. Bitcoin has also seen some big drops, most recently falling 12% in just 10 days from January 1 – January 10, 2022.

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 that cryptocurrencies are considered a risky investment.

While the list of large corporations (like PayPal, Square, and MicroStrategy) and self-made billionaires announcing large investments in Bitcoin continues to grow, volatility could be a big drawback for investors with low risk tolerance, as well as people who are close to retirement. Seeing investment funds fall by 10 or 20% (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 is the fees involved.

Aside from initial deposit minimums that are typically in the thousands, investors in Bitcoin IRAs can expect to pay fees including account setup fees, monthly platform fees, yearly administrative fees, transaction fees, and cold storage fees. Additionally, in some cases there are trade minimums, and there may be additional fees in excess of 1% per trade.

And as with other IRAs, withdrawing funds before retirement normally 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.

Yes, SoFi offers crypto trading.

With 30 coins to trade from and no-fee crypto purchases1, our app offers a secure way to trade crypto 24/7.

Get up to $100 in Bitcoin after your first trade2.


Is a Bitcoin IRA Account Safe?

The safety of a Bitcoin IRA account depends largely 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 ensures 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. 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?

There is no situation in which Bitcoin investing is “safe” — there is always a risk of loss with the current state of volatility in Bitcoin and cryptocurrency in general.

As far as investment gains or losses are concerned, investors will have to decide for themselves whether or not long-term Bitcoin investing falls within their comfort level and their goals.

That said, the prospect of incredible returns seems to sway more and more investors. Since 2009, the price of one Bitcoin in U.S. 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.

Are Bitcoin IRAs Right for You?

As with any retirement planning, it’s important to take into consideration your time horizon (how many years it will be until you retire) as well as retirement goals, budget, and other personal factors. For individuals who feel comfortable with the general volatility of cryptocurrency in general, and Bitcoin in particular, a Bitcoin IRA might be one way to bring an additional layer of diversity to a retirement portfolio.

But for investors with low risk tolerance, a Bitcoin IRA is more financially risky than a traditional IRA composed of stocks and bonds.

The Takeaway

A Bitcoin IRA is an 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.

But there are other ways to invest in Bitcoin and other cryptocurrencies. With SoFi Invest®, members can trade dozens of cryptocurrencies like Bitcoin, Ethereum, Dogecoin, Solana, Litecoin, Cardano, and Enjin Coin.

Find out how to get started with SoFi Invest.


SoFi Invest®
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Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
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SOIN20193

1 SoFi will assess a fee for each crypto transaction outside of automatic direct deposit purchases. For more information, visit sofi.com/invest/buy-cryptocurrency.

You need both a SoFi Invest crypto account and a SoFi Invest active investing account to get access to no-fee crypto purchases with direct deposit. Active investing and brokerage services are provided by SoFi Securities LLC, Member FINRA/SIPC. Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

2 Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on June 30th, 2022. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.

First Trade Amount Bonus Payout
Low High
$50 $99.99 $10
$100 $499.99 $15
$500 $4,999.99 $50
$5,000+ $100

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