What’s a Bitcoin IRA? Should You Open One?

A decade ago, cryptocurrency was a fringe technology embraced only by a relative few. However, it quickly gained traction and became more mainstream as an investment vehicle and a digital currency.

One of the relatively new uses of Bitcoin — the first cryptocurrency ever created — is the creation of IRAs. Like typical IRAs, Bitcoin IRAs are tax-advantaged accounts. However, they have a few benefits you may not be familiar with. Here’s a closer look at some of the pros and cons of this exciting new investment opportunity.

A Brief Introduction to the Bitcoin IRA

When you fund traditional and Roth IRAs, you’re purchasing mutual funds. Bitcoin IRAs work similarly, but you purchase Bitcoin (BTC) instead.

If you already have a non-Bitcoin IRA, you likely discovered that opening, funding, and managing the account was pretty straightforward. Unfortunately, the process is different for Bitcoin IRAs. 

There are three primary facets of opening and funding a Bitcoin IRA. Some providers keep it simple by offering all three on a single platform. Others require you to use a second provider for one or more steps.

1. Purchasing Bitcoin

You can’t buy Bitcoin just anywhere. Just as you need to access trading platforms to purchase stocks and bonds, you must go to an online crypto exchange to purchase Bitcoin to fund your IRA.

2. Entrusting Bitcoin to a custodian

When you open a Roth IRA or traditional IRA, a custodian takes care of your deposit funds. The custodian—a bank or similar financial institution— is responsible for holding your funds and ensuring your IRA complies with all IRS regulations.

3. Selecting secure storage

Most (but not all) platforms offering Bitcoin IRAs also offer ultra-secure storage of your Bitcoin. In the event of security breaches, tech-savvy thieves could steal your funds, so choosing a reliable storage provider is an absolute must.

The Pros of Opening a Bitcoin IRA

Why add a Bitcoin IRA to your portfolio? You might be surprised at some of the advantages it offers.

Bitcoin isn’t impacted by inflation

Rising inflation can slash the value of your retirement accounts. However, unlike USD, Bitcoin has a fixed supply. Its purchasing power isn’t affected by inflation.

It helps further diversify your portfolio

A diverse investment portfolio is a robust investment portfolio. While spreading investments across asset classes is vital, investing in uncorrelated ones is equally crucial. Bitcoin’s value operates independently from stocks and bonds, providing a diversification opportunity.

It may help you avoid capital gains tax

Capital gains tax adds up fast. Fortunately, if the Bitcoin in your account grows in value, you won’t have to pay capital gains taxes. The only time you need to is when you sell Bitcoin for a profit.

Bitcoin is poised for growth

There’s no guarantee of growth with an investment, but the forecast for Bitcoin looks reasonably good. If it keeps gaining popularity, Bitcoin will likely increase in value.

The Cons of Opening a Bitcoin IRA

Bitcoin IRAs have a lot of positive aspects. But before you open one, knowing some of the risks is vital.

It can be volatile

Bitcoin holds the potential for huge returns. However, its value can also crash with little to no warning. For example, its value peaked in 2021 at over $65,000 per coin. By December 2022, it had fallen to just under $17,000. Its values began to climb back in 2023, and by December, it was just over $40,000.

For a young person with plenty of time until retirement, the investment risk is often outweighed by potential returns. However, if someone is nearing retirement age, they likely won’t want to take the chance.

There are high fees

Bitcoin IRAs are generally more expensive to set up and maintain than typical IRAs. Most providers assess setup fees, custody fees, and fees for trading.

Tax loss harvesting isn’t an option

Tax loss harvesting is a method to offset investment losses against capital gains tax. Notably, this approach does not apply to Bitcoin IRAs.

Most companies limit trading options

If you already have a preferred cryptocurrency exchange, check if a Bitcoin IRA provider accepts it. Many providers only work with selected exchanges.

Is a Bitcoin IRA right for you?

Only you can answer that question. As you can see, Bitcoin IRAs have some definite advantages over typical IRAs. Still, they may only be suitable for some. We highly recommend consulting a financial advisor. They can look over your finances and help you make the right decision for your financial future.

Conclusion

The emergence of Bitcoin IRAs over the past decade has added a new dimension to retirement investing. The benefits of including Bitcoin in your portfolio, such as resistance to inflation, diversification opportunities, and growth potential, make it an enticing option for some investors. 

However, weighing these advantages against the risks associated with Bitcoin’s volatility, high fees, and limitations on tax strategies is crucial.

When making any investment decision, weighing your options and seeking professional guidance is crucial. This approach ensures alignment with your broader financial strategy, contributing to a secure and prosperous future.