Diversification is important when investing, as it reduces risk over time and allows investors to find their ideal blend. Cryptocurrency has become a hot topic in investing, with some people swearing by it and others remaining skeptical about its longevity.
Cryptocurrency has created a new way to diversify and experiment with investing. Here’s what you need to know about opening a cryptocurrency IRA, and the potential benefits and pitfalls
What is a Cryptocurrency IRA?
In simplest terms, a cryptocurrency IRA is an IRA that contains digital currency, like Bitcoin. Whereas cryptocurrency is still relatively new, the IRS considers it property for taxation purposes, treating it like a stock or bond. As such, a cryptocurrency IRA works a bit differently from a traditional IRA. However, the core elements still apply— for example, maximum contributions, early withdrawal penalties, etc.
Benefits of a Cryptocurrency IRA
In addition to being a new and unique way to diversify your portfolio, cryptocurrency has the potential for an incredibly high ROI.
Many investors view cryptocurrency as a Robin Hood type personification against traditional banking. The idea is that when the global banks are in free fall, cryptocurrency is a for the people by the people currency that will endure. So far, that’s proven to be true.
Cons of a Cryptocurrency IRA
One of the main pitfalls of cryptocurrency is that it’s incredibly volatile. While there’s potential for great returns, there’s also a significant risk that it may not exist by the time investors reach retirement age.
As cryptocurrency is so new, it can be challenging to find an experienced custodian to oversee your IRA. Furthermore, the lack of regulation surrounding digital currency means that the fees associated with handling it are significantly higher than other investment options.
How to Open a Cryptocurrency IRA
Even with the inherent risks, opening a cryptocurrency IRA is a worthwhile endeavor for those looking to diversify while leaving the majority of their money in other types of investments.
Here’s how you can open a cryptocurrency IRA.
Open a Self-Directed IRA
The first step is to open a self-directed IRA, which is the only option for managing cryptocurrency. To do so, you’ll need to research the best cryptocurrency IRA companies to find an accredited custodian to manage your SDIRA. Keep in mind that a custodian isn’t a financial advisor— their job is to follow your directions. You are responsible for researching and directing your investment portfolio.
When seeking a custodian to manage your SDIRA, look for someone who has ample experience. Ideally, you’ll find someone with years of experience as a custodian with additional focus on cryptocurrency.
Custodians require payment for their assistance. When vetting potential custodians, pay close attention to the fee structure. Some choose to take a commission while others charge a flat rate. Don’t hesitate to ask clarifying questions to understand what those numbers will look like before committing to a custodian.
Choose a Facilitator
When you want to purchase cryptocurrency for your SDIRA, you can’t facilitate the transaction yourself. In other words, you have to find a source and have the process managed by a facilitator and your custodian.
Place the Order
The facilitator will place orders on your behalf and coordinate the transaction with your custodian to ensure the money reaches your account. Both the facilitator and the custodian will receive a fee based on the transaction. Depending on the vendors you choose, the fee could be a flat rate or a percentage of the transaction.
Should You Open a Cryptocurrency IRA?
Deciding whether to open a cryptocurrency IRA is a personal decision that ultimately depends on your diversification goals and strategy. If you choose to go this route, dedicate time to researching your options and becoming familiar with this opportunity.