Cryptocurrency is starting to garner a lot of attention from everyday investors. Digital currencies are becoming more popular and mainstream, as investor Daniel Calugar explains, and many people wonder whether investing in them as a means for retirement planning is worthwhile.
One of the most common ways to save for retirement is through an Individual Retirement Account or IRA. Today, you can purchase Bitcoin IRA funds that allow you to invest in cryptocurrency for your retirement.
Before you dive headfirst into doing so, though, it's essential to know what it is and the pros and cons of a Bitcoin IRA.
What is a Bitcoin IRA?
IRAs and other retirement accounts are typically looked at as safe ways to grow money for retirement. Then, it seems counterintuitive that one would invest in something as volatile as Bitcoin in an account meant for retirement.
Despite this, there are a lot of people who have done so. As of now, there is no official IRS retirement account that's designated specifically for Bitcoin or any other cryptocurrency. There are, however, IRAs that include Bitcoin within their portfolio.
All cryptocurrency held in retirement accounts has been treated as property by the IRS since 2014. As such, they are taxed in the same way as bonds and stocks are.
Many custodians still don't accept Bitcoin as part of their IRAs. If you want to include cryptocurrency in your retirement plans, you may need to opt for a self-directed IRA.
Bitcoin IRA Advantages
Perhaps the biggest advantage of holding Bitcoin or other cryptocurrencies in your retirement account is it helps you diversify your holdings. It's an investment that often isn't tied to other market factors, meaning it won't drop in value just because the rest of the market is.
At the same time, holding Bitcoin as part of your retirement portfolio allows you not to be overly committed to cryptocurrency.
Because many investors believe the long-term outlook for cryptocurrency is so high, investing in them through a Roth IRA is a great way to grow that money tax-free. In addition, investing in Bitcoin through an IRA could allow you to avoid having to pay capital gains taxes.
Bitcoin IRA Disadvantages
Dan Calugar says the most significant disadvantage to a Bitcoin IRA is that, like all cryptocurrencies, it is a highly volatile investment. Bitcoin experiences considerable increases in price but huge drops, too -- sometimes, seemingly without warning.
This is the type of investment that typically doesn't fit with a retirement account. As people approach retirement age, they usually want to have safe investments, so the money they've built over the years doesn't disappear.
With Bitcoin, that nest egg could decrease in value overnight. People near retirement age don't have the time to wait for the subsequent big increase in price following a huge drop. If that happens, they may need to push back their planned retirement as they rebuild their hard-earned savings.
It's also very possible that the value of Bitcoin and cryptocurrencies drops significantly and never bounces back. Some people have opined that if the federal government were to regulate Bitcoin, it would spell the end to the value of cryptocurrencies.
About Daniel Calugar
Daniel Calugar is a versatile and experienced investor with a computer science, business, and law background. He developed a passion for investing while working as a pension lawyer and leveraged his technical capabilities to write computer programs that helped him identify more profitable investment strategies. When Dan Calugar is not working, he enjoys working out and being with friends and family, and volunteering with Angel Flight.