CEO and Founder of Regal Assets, an international alternative assets firm with offices in Beverly Hills, Toronto, London and Dubai.
It’s been a good year for cryptocurrency investors. As of Oct. 22, the price of bitcoin (BTC) was up roughly 80% since January 1. However, there’s no denying that the digital asset is prone to volatility and price swings. Bitcoin’s erratic price movement has left many investors wondering whether to include it in their individual retirement account (IRA), or if it’s better off left out. (Full disclosure: Author holds investment in bitcoin.)
As the CEO of an alternative investment company, I’ve helped countless clients invest in assets such as precious metals and cryptocurrencies. Since the inception of bitcoin, I’ve been watching its development closely, and there have been times when I thought its performance and steady increase in adoption among institutional investors made it a good investment. On the other hand, there were periods when the asset was simply too unstable to confidently invest in.
If you’re thinking about investing in cryptocurrencies via a bitcoin IRA, here are a few things to know beforehand.
What Is A Bitcoin IRA?
Let’s first break down the details of a bitcoin IRA and why it might be an attractive option for investors looking to get into alternatives. A bitcoin IRA is a tax-advantaged retirement account like any other, only that it includes cryptocurrencies.
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These IRAs are self-directed retirement accounts, which can either be Roth or traditional. Such accounts can only be opened with a custodian that allows alternative assets (i.e., you won’t find these accounts at your typical brokerages). These IRAs aren’t limited to cryptocurrencies — rather, they allow for a wide range of asset classes, including traditional stocks and bonds as well as alternatives.
Diversification And The Impact Of Economic Instability
For investment purposes, cryptocurrency is, more than anything, a diversification tool. Unlike other diversifiers, such as precious metals, bitcoin is a highly asymmetrical investment. In other words, the upside potential (i.e., price ceiling) is much higher than the downside risk (price floor). This characteristic can make bitcoin an attractive option for risk-tolerant investors looking to allocate a small portion (5% or less) of their portfolio to a high-growth asset.
At present, bitcoin price movement appears to be influenced by systemic instability caused by the coronavirus pandemic and, as angel investor Sankalp Shangari noted in an April interview for ETBFSI, is becoming increasingly correlated to the performance of the U.S. equities market. If the coronavirus situation worsens and businesses have to undergo further restrictions, we should expect to see a BTC bull run based on historical precedent.
Ultimately, a bitcoin IRA is most appropriate for long-term investors who can ride out BTC’s significant price fluctuations. In the meantime, BTC provides value as a hedge against U.S. dollar inflation for investors bearish on the future of the dollar.
Know The Risks
Investing in bitcoin is not without its share of risks. Critics of cryptocurrencies rightfully point out that the asset is still immature and suffers from many pitfalls and risks that one would expect of emerging technological assets, such as:
• Volatility and erratic price movement
• Fraudulent exchanges
• A limited and unpredictable regulatory environment
Many of these pitfalls can be avoided by carefully vetting bitcoin IRA providers and currency exchanges, as well as managing a properly diversified investment portfolio. Likewise, investors should look for custodians with strict cold storage protocols to avoid theft and hacking, as well as insurance on the full amount of each deposit.
In addition, it’s best to stay clear of a bitcoin IRA if you have a short investment horizon of five years or fewer. Given the volatility of the asset, a steep downward price movement could delay your retirement or cost you a sizable chunk of your savings. The same is true of conservative, risk-averse investors. These types of accounts should only be considered by investors who can afford to lose some of their savings if the asset takes a downward turn.
The Bottom Line
When deciding whether to invest in bitcoin via an IRA, you should understand the cryptocurrency landscape and its potential for the future, your individual risk tolerance, your time horizon and your investment objectives. A bitcoin IRA can be a good option for retirement investors with a long time horizon on their portfolio (i.e., 10 or more years) or those who can afford to assume the additional risk, because of its upside potential in the long-term. Those close to retirement age, however, might be better off playing it safe and sticking to fixed-income traditional assets or time-tested hard assets such as precious metals.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.