Bitcoin IRA – Everything You Need To Know

bitcoinBitcoins, a form of cryptocurrency, is becoming increasingly interesting in the world of investments. And whenever there is an opportunity for investment, people start to wonder whether they can also add it to their individual retirement account or IRA. It must be said that, today, it is not very common for bitcoins to be included in IRAs. However, it should be noted that just a few years ago, it also wasn’t common for online shops to accept them as a form of payment, but that has now changed. Hence, while still quite unique, it is possible to include them in your IRA, so long as you make the right types of provisions.

What Are Bitcoins?

It is important to first understand what bitcoins, and cryptocurrencies in general, are. A bitcoin is a form of currency that is completely digital. This means it is created electronically and held electronically as well. There is no central bank that controls this currency, and it isn’t printed like the usual currency either. Rather, people, and now also businesses, create them through computer systems the world over, using a type of software designed for solving mathematical problems.

Bitcoins, being an electronic form of currency, are used to purchase things electronically as well. In that sense, they are exactly the same as any other currency, as the ForEx markets now also allow for digital trading. But what is different, however, is that there is no centralization in bitcoins. There isn’t one central bank or some other institution that is in control of the currency. Rather, it is 100% open source. For some people, this is what makes it so attractive – there isn’t any institution, which can make a profit out of it, that is in control of it.

The First Bitcoin

satoshi nakamoto

Satoshi Nakamoto

The first bitcoin was developed by Satoshi Nakamoto. He created a payment system that was fully based on mathematical proof. What he wanted to do was to create a fully independent currency that did not come under any type of authority. Rather, he wanted to make sure it could be transferred between accounts instantly, using no or very low transaction fees.

The currency is not physically printed. This means it is also unaccountable to general people. Rather, it fully makes its own rules. This is in stark contrast to banks, which can decide to print more money in an effort to repay national debt. However, in so doing, they also devalue their currency. Bitcoins are completely digital, and a community of people, which can be joined by anybody, creates them. The official terminology for this is “mining”, meaning computer powers are used within a type of distributed network in order to create and find bitcoins. Through this same network, any transactions made in this digital currency are made. As such, bitcoin is both a currency and a payment network.

The Bitcoin Protocol

The currency does follow a protocol, however. This protocol includes all the rules that make it possible for the currency to work. One of those rules is that miners can never create more than 21 million bitcoins. However, it is possible to take one bitcoin and divided into smaller pieces. The smallest, which is one hundred millionth of a bitcoin, is known as the “Satoshi”, named after the developer of the currency.

Global currencies are based on either the value of silver or gold. When they were first developed, the idea was that if you handed over paper money in a bank, they would give you some gold back. The difference with bitcoins, however, is that they are not based on a physical item. Rather, they are based on mathematics. The world over, people can now access programs that are based on a specific mathematical formula that allows them to produce bitcoins. This is an open source mathematical formula, which means anyone can use it. In fact, the software itself is also open source, which means that anyone can access it and make sure that it is working properly.

Unique Features of Bitcoins

bitcoinThere are a number of features of bitcoins that make them different from currencies that are owned by banks and backed by governments:

  • Bitcoins are decentralized.
  • It is very easy to set up a bitcoin account.
  • It is 100% anonymous.
  • It uses a fully transparent system.
  • Any transaction fee is minuscule.
  • It is very fast.
  • Once you send a bitcoin, you cannot get it back unless the recipient returns it to you.

So how does this all link to the IRA?

Bitcoins and Permitted IRA Assets

The first thing to understand is that there is such a thing as “permitted assets” within IRAs. Unfortunately, the rules are not very clear when it comes to bitcoins. This is because it is not really clear what type of asset is a bitcoin, although financial experts seem to agree that it is a standalone type of asset. In essence, any asset is accepted to be included in an IRA, with the exception of the following:

  • Rugs
  • Artwork
  • Metals, although certain forms of bullion are an exception to this
  • Antiques
  • Stamps
  • Gems
  • Alcoholic drinks.
  • Coins, again with the exception of certain types of numismatic collections
  • Various forms of tangible property

When looking at this list, it becomes clear that bitcoins should be acceptable, as they do not fit into any of the above categories. However, the IRS has not made any official decisions yet when it comes to whether cryptocurrencies, including bitcoin, can be accepted into retirement plans. As a result of this, retirement investment funds are not clear yet either on whether to accept them or not. That being said, the current move seems to be leaning towards accepting them into retirement plans, although progress has been quite slow. However, this also means that, if you want to add bitcoins to your IRA, you should be able to find a plan that accepts them, albeit with a bit of research.

Finding an IRA Custodian

What you need to do if you own bitcoins and you want them to be included into your IRA, therefore, is find a custodian that is willing to accept this type of currency. Unfortunately, these continue to be quite hard to find. If you are interested in some of the best known custodians, you will find it nearly impossible to work with them. And there is a second concern as well. For example, the largest IRA custodian in the world, Fidelity Investments, had accepted bitcoin for a short period of time but just a few months later, they stepped away from them again.

Nevertheless, there are now a number of custodians that accept bitcoin. They are:

  • The PENSCO Trust Company
  • The Millennium Trust Company
  • The Entrust Group
  • Regal Assets

The PENSCO Trust Company is a relatively unknown company, and very little is known about how good they are when it comes to accepting bitcoin. The Millennium Trust Company and The Entrust Group, meanwhile, do seem to accept bitcoins in their IRAs, although their websites do not make it clear that they actually do. This means that it may be difficult to receive proper support through them. It is for these reasons that Regal Assets is the recommended option to go to.

The situation at present is that the vast majority of IRA custodians are still wary of bitcoin. They find it to be too speculative and struggle to understand it as an asset. There is also a concern that there will suddenly be regulatory changes that will affect bitcoins or at least make it hugely complicated.

Regal Assets

regal assetsRegal Assets has been leading the precious metals IRA industry for years, and has only recently started to accept bitcoins in their IRA. However, they are leading the way in terms of making sure that people can actually use this asset. This company has got a very good reputation with an A+ rating from BBB (Better Business Bureau), an “AAA” from BCA (Business Consumer Alliance), 5 stars from over thousand of happy customer reviews on Trustlink, no clients’ complaints, and zero fraud lawsuit so far.

They have created a free bitcoin IRA guide to show people how it works, and the benefits of this particular type of asset. They cite a number of specific reasons as to why bitcoins are now often referred to as “The New Gold”, and why it therefore stands to reason that they should be included in IRAs. Those reasons include:

  • That it is a decentralized form of currency, free from government policies and bank manipulation
  • That there is a limited supply of 21 million bitcoins
  • That bitcoins are the way forward, with increasing numbers of businesses and people alike accepting them as currency
  • That the value is not linked to gold and that it often goes in the opposite direction as stocks and bonds
  • That the IRS has currently approved it as a type of currency
  • That it is likely that bitcoins are currently significantly undervalued

The Bitcoin Investment Trust

BITIt is also important to be aware of the Bitcoin Investment Trust, or BIT. SecondMarket, a financial startup company, was the first to create the BIT. Their goal is to help people make investments into private tech companies. BIT was launched in 2013 and is currently sponsored by Grayscale Investments LLC. This, in turn, is a subsidiary (wholly-owned) by SecondMarket Holdings, Inc, which is also its administrator and custodian. Grayscale is also affiliated with SecondMarket Inc., which is their authorized participant, as well as distribution and marketing partner.

What makes BIT so interesting is that it started purchasing bitcoins around one year ago, and now holds an estimated $36 million worth of the currency. The company only makes its direct investments available to financial institutions and accredited investors, but it is now starting to work together with a number of self-directed IRA options as well. These include The Entrust Group and PENSCO, both of which were mentioned above. Through these arrangements, people can take an investment as low as $25,000 and put it in bitcoins. However, the BIT does have some stringent acceptance criteria:

  • A minimum investment of $25,000
  • That investors are fully accredited
  • Payment of a 2% annual administrative and safekeeping fee

The issue of “accredited investor” is an important one. The Securities and Exchange Commission (SEC) has created a legal definition of an accredited investor. This comes under Regulation D and describes those investors who do not need to be protected by a number of government filings because they are very sophisticated in what they do. An accredited investor, meanwhile, can be a trust, an employee benefit plan, an insurance company, a bank, or an individual.

What this means is that it sounds as if anyone can be an accredited investor. This is true, but only to a certain degree. You do have to meet at least one of the following requirements in order to be classed as an accredited investor:

  • That you earn at least $200,000 per year as an individual or $300,000 as a couple, that you have done so for the past two years, and that you expect your income level to remain the same in the foreseeable future.
  • That your net worth is at least $1 million, whether as an individual or with your spouse.
  • That you are a director, executive officer, general partner, or a combination of these for the person or entity that offers the security.

If you meet all of these requirements, then you are classed as a fully functional investor, which in turn means that the SEC restrictions do not apply to you. If, therefore, you are looking into a bitcoin IRA that has an accredited investor requirement, you will need to meet one of the requirements above in order to be considered.

Bitcoin IRAs – A Good Idea, or Not?

As you can see, with a little bit of research, you should be able to find organizations that enable you to put bitcoins into your retirement fund. However, just because you can does not necessarily mean that you should. Is bitcoin a good investment or not? Someone who invested $200 into bitcoins in 2011 would now be able to have seen that grow to $213,554, which would suggest that it is an excellent investment.

As such, anyone who believes bitcoin will continue to grow in use and importance in the future should consider them to be solid investments into an IRA. At the same time, you must be realistic about the fact that all investments come with risks and rewards, bitcoin IRAs included. Only you can decide whether the fledgling acceptance it has now, which has grown over recent years, will become full acceptance eventually.

If you ever consider to invest in a bitcoin IRA account, you should always consult a real trusted professional to help answer your remaining questions.

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