June 28, 2019 By Inside Your IRA Team Leave a Comment
Investors who are considering investing in Bitcoin should learn as much as they can before diving in. This article breaks down everything about Bitcoin and answers some of the most frequently asked questions about Bitcoin investing.
RELATED: Decoding The Cryptocurrency Market
In this article:
What Is Bitcoin? | Basic Questions Inside Your IRA
What Is Bitcoin?
What is Bitcoin? If this is the first time you’ve heard of it, there is more to Bitcoin than being the cryptocurrency that took the trading market by storm.
Though its nature is volatile, there are several options for investing in Bitcoin including investing it inside your IRA.
Here are a few Bitcoin investment facts to help you decide if you should include it as part of your retirement nest.
Bitcoin is a digital currency and payment system that uses a unique encryption method to generate and validate the transfer of funds. It is a decentralized currency operating independently of a central bank or an administrator.
It’s a currency just like the $, £, or the €. It is also encrypted through network nodes.
The transactions that happen between parties take place without a third-party intermediary. These transactions are then recorded on a ledger that is publicly distributed, which is called the “blockchain.”
Investing Bitcoin in IRA
1. Does the IRS Allow the Purchase of Bitcoins for IRA Use?
IRAs go beyond mutual funds, stocks, and other asset classes. Do take note that the law doesn’t allow life insurance and collectibles as an IRA purchase. Therefore, Bitcoin is 100% allowed.
2. What Exactly Are Collectibles Under the IRS Rule?
The examples of collectibles are as follows:
Rugs
Coins (exception of some coins)
Artwork
Gems
Metals (exception of some types of bullions)
Antiques
Alcoholic beverages
Other tangible personal property
3. How Do I Add Bitcoins to My IRA?
1. Use the Right Kind of IRA: Self-Directed IRA
Self-directed IRAs allow diverse retirement assets beyond the typical stocks, bonds, and mutual funds. You can choose from self-directed IRA providers and open an account with them to get started.
2. Establish a Bitcoin Wallet
A Bitcoin wallet is equivalent to a safe deposit box. You can ask your self-directed IRA custodian for their ideal strategy.
You may also download them through apps, but this can be your last option.
3. Fund Your Bitcoin Wallet Using Capital Funds from Your IRA Only
Don’t mix IRA funds with other sources of capital. The IRS doesn’t allow such practice as it can create tax problems.
4. What Are the Possible Complexities When Investing Bitcoin in IRAs?
The IRS released a notice informing Bitcoin investors to avoid using an IRA Bitcoin wallet to make purchases, payments, or any other transactions with someone you’re related to.
The same rule applies if you also use it in conjunction with businesses you own or control. The IRS defines them as “disqualified persons.”
You cannot use any asset bought by your IRA or the Bitcoin wallet in your IRA.
5. What Are the Benefits of Using a Self-Directed IRA for Your Bitcoin Investment?
This will allow you to add new types of assets prohibited under the Roth and Traditional IRA accounts. Bitcoin, among other cryptocurrencies, fall under this asset category.
A self-directed IRA also allows the investor to make his or her own decisions financially. Bitcoin strategists, though, recommend investing in Bitcoin through smaller portions in your portfolio the same as gold.
6. Is My Bitcoin Investment Safe Inside the IRA?
Since trading of Bitcoins takes place online, a major concern falls on network hacking by thieves.
Although there is no assurance this won’t happen, the developers of blockchain are constantly working to improve their system. This is also to safeguard all cryptocurrency investments made.
So far, there are no current hacking breakthroughs cited. There are reports, though, of hacking incidents where a security breach happened among three companies.
These companies are NiceHash (Slovenia-based company), Bitfinex (Hong Kong-based Bitcoin exchange), and Bitstamp (European exchange).
What is a Bitcoin exchange? It is a digital marketplace for selling and buying Bitcoin.
7. Is Bitcoin a Suitable Investment Inside Your IRA in the Long Run?
Bitcoin is a good investment inside your IRA, given its structure. Although its potential for profitability doesn’t provide a definite assurance, buying, holding, and selling Bitcoin in the Bitcoin market works the same way as stocks.
This means the same rules apply to Bitcoin as well.
State of Bitcoin Today
There’s no doubt Bitcoin is the largest and most popular cryptocurrency in the world today. It also continues to evolve.
1. Safety and Security
Safety and security remain to be the leading concerns among Bitcoin users. While it operates in cryptocurrency and blockchain technologies, for most people, these are often not enough.
Fortunately, this aspect of Bitcoin has also grown. Those who remain wary of how secure Bitcoin investing is may want to look into the following additional security options when they want to trade Bitcoin or transfer Bitcoins:
Bitcoin Private — This is a new kind of Bitcoin that emerged after a fork, or the separation of cryptocurrencies, due to variances of the code. In this scenario, Bitcoin joined with Zclassic, which allows for additional security protection when they trade Bitcoin.
Cold Storage Bitcoin —This refers to the process that permits investors to store Bitcoin offline and into hardware, such as a USB.
Bitcoin Address — What is a Bitcoin address? It is a single-use token a person uses when they engage in buying and selling of Bitcoin.
2. Worth of Bitcoin
Whether you buy cryptocurrencies for trading or for long-term investing and leveraging, you definitely want to know their value in the market. This can help answer one of the biggest questions: should you invest in Bitcoin?
Bitcoin remains to be a speculative investment, which means it doesn’t hold guarantees. You can win some and lose some big time.
As of June 2019, when you buy and sell Bitcoin, the market cash price is over $9,000, or more than 1.50% higher than the previous day.
3. Other Ways to Invest
Bitcoin also gives you multiple ways to earn money apart from using a self-directed IRA:
Bitcoin Cloud Mining — Bitcoin miners help solve the blockchain in a Bitcoin network so transactions push through, and as a reward, they earn from the transaction fees. Those who are interested in bitcoin cloud mining can sign up with a cloud mining company online. Since it’s done via the cloud, it opens up opportunities for people in remote areas and doesn’t require too much power and hardware setup.
Free Bitcoin — Some websites such as Bitcoinget.com allow you to earn Bitcoin if you do certain tasks, such as answering surveys.
Bitcoin Exchange or Bitcoin Marketplace — Using your digital wallet, which you can get when you apply with your credit card and government-issued ID (i.e. driver’s license), you can purchase Bitcoins and sell them.
There’s no best way to invest in Bitcoin as it all depends on a number of factors, including investment goals. However, rest assured that there are a variety of ways to get into Bitcoin investing.
4. How People Are Using Bitcoin
Bitcoin is becoming a tool for peer-to-peer payment, and a lot of businesses now accept it as payment. In this process, the buyer scans the seller’s QR code on the latter’s Bitcoin wallet app to make the payment.
Aside from purchases, Bitcoin users also use it to send money internationally. Unlike more traditional methods of international transfer such as via banks, Bitcoins can be transferred immediately with no extra fees and with no regulation on the amount.
There are certain debit cards that also offer integration with Bitcoin. These can be used to pay in establishments that don’t accept Bitcoin.
Bitcoins can also be exchanged for cash and vice versa through a Bitcoin ATM. They can be used for international cash-to-cash remittances, provided that both parties use a Bitcoin ATM.
These points will be handy once you start investing in Bitcoin and should give you a general idea where this digital currency is going.