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In January 2020, the price of bitcoin was around USD$9,000. A year later, on January 1, 2021, bitcoin’s price was USD$29,000. That’s an increase of more than 220%. Cryptocurrency’s dizzying price surges have generated a lot of interest in digital money, as investors delve into the viability of this new form of currency as an investment for Individual Retirement Accounts (IRAs).
However, due to its well-known volatility, Bitcoin might be a hard sell for conservative money managers. Not so for several intrepid financial services firms, who give their clients a choice of investing in cryptocurrencies via self-directed IRAs. These firms claim to have handled hundreds of millions of dollars in client retirement investments last year. Finding the best Bitcoin IRA companies will let you know more about this.
If you’re seriously considering becoming a Bitcoin investor, it would be prudent if you understand what Bitcoin is, and what makes it tick. Cryptocurrencies like Bitcoin are relatively new players in the world of finance.
- 1 What is Bitcoin?
- 2 How Does This Virtual Money Works?
- 3 How Does One Acquire Bitcoin?
- 4 Getting To Know Bitcoin IRA
- 5 Pros And Cons To Be Considered When Investing In Bitcoin IRAs
- 6 Pros Of Investing In Bitcoin IRAs
- 7 Cons Of Investing In Bitcoin IRAs
- 8 Conclusion
What is Bitcoin?
Bitcoin is a digital currency, a kind of virtual money that exists solely on computers. It was invented without a central bank or a central authority to regulate it, therefore it’s completely decentralized. Every Bitcoin has its ‘identity’ encrypted within it so each Bitcoin cannot be copied or duplicated.
Also, this digital currency has a finite number. Its inventor, an individual (or perhaps a group— no one is sure) using the name Satoshi Nakamoto put the limit of the number of Bitcoins at 21 million. Nobody can create another Bitcoin out of thin air, although new ones can be ‘mined.’ These mined bitcoins, however, are still part of the 21 million. So far, less than 19 million bitcoins are in circulation.
Every Bitcoin transaction is recorded and encrypted, and anybody in the world can verify that transaction. Moreover, every Bitcoin used in the deal can also be verified as being owned by an individual, although the identification of the individual is hidden. Records are kept in a sort of digital ledger called ‘blockchain.’
How Does This Virtual Money Works?
Since Bitcoin is essentially digital money, it can be stored in a digital ‘wallet’ on computers and smartphones. You can send and receive Bitcoins using this wallet. Each time you receive and send Bitcoins, it’s recorded and verified in the blockchain. The participants themselves monitor the transactions, as there is no central authority that does the monitoring.
This ‘ledger’ or blockchain is public and downloadable. Verifying and updating the blockchain takes a tremendous amount of computing power. If you have the proper computer equipment, you can help the blockchain and you will get rewarded for it through pieces of Bitcoin. This is the process of ‘mining’ for bitcoins.
The more people use bitcoin, the more valuable it becomes.
How Does One Acquire Bitcoin?
There are three ways to acquire Bitcoins:
Buy Bitcoins Using Hard Currency
First, you’d need to have a secure connection to the internet. You’d also need to create an account at a cryptocurrency exchange, provide personal identification documents, and a method of payment. You should have your own digital wallet, too.
There are several valid methods of payment: credit cards, debit cards, or bank accounts. There are also specialized ATMs where you could get Bitcoin, as well as peer-to-peer exchanges. Bitcoin ATMs, however, have been requiring IDs issued by the government since last year.
Accept Bitcoin As Payment
If you’re a business owner and you’re willing to accept Bitcoins, you have to announce your desire to the market first. Also, you should have a Bitcoin wallet. This wallet contains your Bitcoin address, which is similar to an email address. This is where your clients would send their Bitcoin payments.
Mine For Bitcoin
The third way to acquire Bitcoin is to mine for them. Mining for Bitcoins doesn’t require a pickaxe or explosives; instead, you’d need powerful computers to solve complicated math problems. Mining for Bitcoin produces two results. First, when a computer solves one of these complex problems, a new Bitcoin is produced. Second, solving these math problems means the payment network is trustworthy and secure. The transaction is therefore verified.
Each Bitcoin trade that occurs is called a transaction. Transactions that happened online or in-store are recorded through point-of-sale methods, physical receipts, and banks. By clumping together transactions in ‘blocks,’ miners accomplish the same thing. The transaction is added to the public ledger or blockchain. These blockchains are maintained and can be verified later.
Getting To Know Bitcoin IRA
An Individual Retirement Account (IRA) is a type of retirement system offered by financial firms to individuals. It’s a way for people to save their money for retirement that’s advantageous to them in terms of tax benefits. With Bitcoin IRA, investors have a chance to diversify their clients’ retirement funds.
Bitcoin IRA is new, but self-directed IRAs have been around since its creation in 1974. These IRAs, created by the government, permit you to possess gold, real estate, and other non-traditional assets, which now could include cryptocurrencies. They’re also called alternative assets and are distinct from regular assets like stocks and bonds.
Each case may vary, but generally, financial managers advise their clients to have up to 25% of their funds dedicated to acquiring alternative assets. As an alternative asset, Bitcoin IRA is interesting because cryptocurrencies can be moved and handled in unique ways. There are several benefits, but the most important is the added level of security.
In 2014, the IRS has considered cryptocurrencies including Bitcoin in retirement portfolios as property, meaning, like stocks and bonds, virtual money is taxable property.
Investors also like the idea of having greater control over their investment. This significantly lessens the danger that comes with including a third-party, particularly when it comes to fraud or mismanagement.
Pros And Cons To Be Considered When Investing In Bitcoin IRAs
There are several advantages and disadvantages you have to consider before deciding on whether to use Bitcoin IRAs. For example, many financial advisors discourage individuals from investing their retirement savings in Bitcoin because of its volatility. On the other hand, cryptocurrencies continue to grow. You could also read about how to trade cryptocurrencies to learn more about them.
Pros Of Investing In Bitcoin IRAs
- Diversifying your retirement portfolios is among the most important advantages of investing in Bitcoin IRAs. As any financial manager will tell you, diversification is crucial because it can protect your investment in the event of significant market downslides or economic crises that could occur in the future.
- Financiers consider cryptocurrencies as an excellent tool for diversification. Other diversifiers, such as gold, can’t compare to Bitcoin when it comes to growth potential vs. downside risk. Bitcoins’ chances of appreciating are greater than their chances of depreciating compared to precious metals.
- Bitcoins are highly recommended as an option for investors who don’t mind a little risk and are looking to apportion around 5% of their portfolio to a growth asset with high return potential. Bitcoin IRAs are best suited for long-term investors who can weather the cryptocurrency’s dramatic price swings.
- Avoiding significant capital gains taxes is possible by adding cryptocurrencies in certain kinds of retirement portfolios. Be aware, though, that there might be other fees to consider.
Cons Of Investing In Bitcoin IRAs
- The volatility associated with Bitcoins makes investors balk at setting aside a portion of their IRAs in the digital currency.
- Financial experts caution investors that the hype associated with Bitcoins might be nothing more than just that—hype. Bitcoins, after all, have not yet replaced any hard currency. Furthermore, using Bitcoins in daily business still hasn’t gotten easier.
- Another point of contention against the inclusion of Bitcoin in IRAs is the fees. Trading with Bitcoins via IRAs is not the same as trading stocks, or even trading at a cryptocurrency exchange. You might have to deal with different types of fees in the course of setting up your investment in Bitcoin IRAs. These fees could be initial setup fees, annual maintenance fees, custody and trading fees, and others. Some service providers could also throw in regular maintenance and custody fees.
- Lastly, every Bitcoin trade comes with a set of fees from the custodian and trading partner of the service provider. Withdrawals could also result in taxes at a rate comparable to that of taxes on capital gains. These accumulated fees could easily cancel any tax advantages to be gained by using IRA accounts.
Deciding whether to invest in Bitcoin through IRA can be daunting, as there’s still a degree of weariness that comes from conservative money managers. Understanding what cryptocurrencies are and how they work could help you make the right decision depending on your needs and financial capacity. You should include in your consideration your risk tolerance, as well as your investment goals.
In addition, if your time horizon (that is, the period you expect to hold an investment until you sell your assets for profit) is at least 10 or more years, Bitcoin IRAs might be for you.