Considering Bitcoin for your IRA or 401k? Read this first.

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Last Updated on: 29th May 2023, 09:47 pm

Photo Courtesy of CoinDesk

What Exactly is Bitcoin?

Bitcoin (or BTC) refers to the now world-famous digital currency which was created in 2009. Digital currencies are commonly referred to as “cryptocurrencies.” Bitcoin was the first-ever cryptocurrency. It was developed by Satoshi Nakamoto, an anonymous computer programmer who laid out its theoretical basis in a 2008 white paper. The new cryptocurrency rapidly gained in popularity over the years because it originally pledged to provide a way to send funds from peer to peer without a middleman such as a bank. Unlike legal tender currencies, Bitcoin is not run or governed by a centralized authority.

One of the great advantages of Bitcoin is that it is maintained with private and public security keys. These keys consist of long strings of letters and numbers which are linked together by mathematical encryption by its underlying software algorithm, known as a blockchain. It is this public key which works much like a bank account number in a transaction. The private one functions more like your debit card's PIN number and is a critically important secret you only share when you are giving final authorization on a transaction.

Bitcoin has long been considered a highly speculative investment. This is why individuals are often warned not to convert all of their life savings into BTC. Always consult with your financial advisor before making an investment decision, including the decision to purchase Bitcoin or any other cryptocurrency.

A Review of Bitcoin as an IRA Investment

Despite the impressive growth that cryptocurrencies have shown over the years, this investment class is still seen as highly speculative. Whether Bitcoin will live up to its original ambitions as an alternative global currency and widely-adopted decentralized payment system will depend on how the general investing public perceives it in the years ahead, and whether authorities will enact regulations to rein in its potential.

For investors with an appetite for risk, Bitcoin could make a worthwhile addition to a well-diversified investment portfolio. Below, we've listed some of the principal reasons why an investor might want to invest in Bitcoin.

#1. Bitcoin is a Novel and Disruptive Global Technology

Do not simply take our word for it. Consider what the experts say on the matter. Peter Thiel, the co-founder of PayPal once said:

“I do think Bitcoin is the first encrypted money that has the potential to do something like change the world.”

Paying for transactions online is not new. Credit cards have permitted you to do this since the 1990s when the Internet first became widespread. Likewise, PayPal has existed and thrived for some time now. The unique function of BTC, however, is that it allows users to securely pay for transactions across borders and different currency jurisdictions throughout the world, without routing through centralized institutions such as banks, credit unions, or international settlement networks.

For example, if an American investor wants to send Bitcoin to a user in Shanghai, China, from a cryptocurrency wallet stationed on a hard drive in Dallas, Texas,  he can do so without incurring any international payment fees, remittance charges, governmental oversight, sanctions interference, or third-party control. And, best of all, the transaction can be completed in a matter of seconds.

#2. Bitcoin Is Truly International And Exists Beyond National Regulators

If there were to be a national regulator for Bitcoin in the United States, you would suppose the Federal Reserve (which oversees the FDIC bank account insurance program and banking regulatory regime) would be the party best suited and placed to do so. Yet Janet Yellen, Chair of the Federal Reserve, admitted about Bitcoin:

“The Federal Reserve simply does not have the authority to supervise or regulate Bitcoin in any way.”

This is because the Federal Reserve and U.S. Treasury do not issue Bitcoin nor guarantee it. It is not a U.S. dollar instrument, but it is instead an entirely different technology that exists on a peer-to-peer computer network that cannot be interfered with by state authorities. This is why the central banks of the United States, the European Union (ECB), and Switzerland (SNB), among others, do not have either jurisdiction or regulatory authority over BTC.

#3. Bitcoin Has Tremendous Power As An Online Currency That Can Not Be Duplicated

Part of what makes Bitcoin so powerful is that it is often considered the “gold standard” for online currencies. Eric Schmidt, CEO of Google once remarked:

“Bitcoin is a remarkable cryptographic achievement and the ability to create something that is not duplicable in the digital world has enormous value.”

Who should know better than Google, one of the largest companies on the planet?

Bitcoin's blockchain algorithm prevents any one Bitcoin from ever being reproduced. In this way, every Bitcoin is unique. A hard cap of 21 million Bitcoins is coded into its blockchain, meaning that there will never be more than 21 million Bitcoins in circulation at any point in the future. This prevents inflation and hyperinflation from impacting Bitcoin the way they do for fiat currencies.

#4. Bitcoin Can Not Be Centrally Controlled or Manipulated

There are countries of the world, like China, which have tried to halt the advance of cryptocurrencies and especially Bitcoin. John McAfee, founder of McAfee antivirus software, says about Bitcoin:

“You can't stop things like Bitcoin. It will be everywhere and the world will have to readjust. World governments will have to readjust.”

The fact that more and more businesses and individuals have accepted it for transactional payments without government backing gives it a democratic flair as a peer-to-peer currency of the people. Since it is not issued by a central bank and largely operates under conditions of anonymity, it is highly difficult to centrally control by state authorities and therefore cannot be arbitrarily seized or confiscated.

#5. Bitcoin Is Now Approved By the IRS as a Valid Form of Property

Observers of the cryptocurrency market waited with bated breath to hear how sovereign taxing authorities like the Internal Revenue Service (IRS) would decide about Bitcoin. They reinforced the concepts behind it when they finally issued a statement on the BTC phenomenon. The IRS says about Bitcoin:

“The IRS is aware that ‘virtual currency' may be used to pay for goods and services, or held for investment. Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like “real” currency — i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance — but it does not have legal tender status in any jurisdiction. Bitcoin is one example of a convertible virtual currency. Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, euros, and other real or virtual currencies. For federal tax purposes, virtual currency is treated as property.”

Therefore, the IRS and other tax authorities, at present, do not treat Bitcoin and other cryptocurrencies as traditional currencies. Rather, they are investable properties that are subject to capital gains taxes like any other legitimate asset. That's why some investors choose to invest in Bitcoin within an IRA or 401(k), in order to take advantage of the unique tax benefits offered to assets held within these retirement accounts.

(Considering investing in Bitcoin within an IRA or 401k? There are currently two custodians in the United States that offer Bitcoin IRA investments, which we have reviewed at the end of this article.)

The Pros and Cons of Bitcoin

Bitcoin Pros 👍

  • It is completely decentralized and free from central bank manipulation and government policies
  • The supply is limited – Only 21 million Bitcoin can ever be mined or produced. This limitation is hardwired into the Bitcoin protocol and can not be changed
  • Bitcoin's value does not correlate with the dollar – In fact, it tends to move in the opposite direction of stocks and bonds, just like gold does. This is one of the reasons it is becoming incrementally more popular over time as a risk hedge similar to physical gold.
  • Bitcoin could be significantly undervalued
  • More and more people and businesses are using Bitcoin – see the Bitcoin transaction table below:

Bitcoin Transactions Per Day, 2018-2023 (Source: YCharts)

Bitcoin Cons 👎

  • The currency is sometimes wildly volatile – In March 2020, the currency dropped over 50 percent in a matter of 48 hours because of widespread negative market sentiment following the onset of the coronavirus pandemic. Afterward, Bitcoin rallied to all-time highs of over $60,000 USD per BTC once the market recovered in 2021.

(Source: Coindesk)

  • There have been several major incidents of Bitcoin cyber-theft over the years – The largest of which occurred at Mt. Gox
  • The collapse of Mt. Gox the long-time largest Bitcoin exchange showed the currency is vulnerable – Though Bitcoin did recover from the  failure of Mt. Gox that caused BTC to crash massively, it did serve as a warning to investors that the trajectory of the asset is not always in a straight line up.

These last two cons are not reasons to avoid Bitcoin. Instead, they are reasons to investigate keeping your Bitcoin in a physical wallet and cold storage. We will consider both of these concepts in the next sections.

Why Use a Physical Wallet?

The most obvious answer to this question is that you would never think of leaving your physical cash just lying around your house or on the dashboard of your car. As with your own real life, a physical wallet helps to secure your Bitcoin holdings. It offers high levels of security if you employ one properly.

Online wallets are the main competitor to physical wallets. A lot of the most popular crypto exchanges (which operate like stock exchanges for cryptocurrencies) have utilized these and then been victims of cyber theft over the past few years. These services really do not offer sufficient security protocols or insurance protection as would keeping your money in a bank.

This is why many investors prefer to use physical Bitcoin wallets. It is also a good idea to back these up from time to time, so that you do not suffer from a tragic computer or mobile phone crash that wipes out your Bitcoin holdings in a catastrophe.

Bitcoin Wallet Photo Courtesy of CoinDesk

Physical wallets are good, but keep one thing in mind. You would probably not choose to store thousands of dollars in your back pocket wallet. This wisdom applies to a Bitcoin wallet as well. By keeping only tiny quantities of the BTC on your mobile phone, laptop, or server for basic daily uses, you can choose to store the balance of your Bitcoin in a safer location. This is where cold storage comes into play.

Why Is Cold Storage Important for Your Bitcoin Investment?

Coin Telegraph sums up the meaning and importance of the phrase “cold storage” extremely well and succinctly with their warning:

“Once you acquire enough coins that losing them would be painful, you should move them to an offline wallet – a method commonly referred to as cold storage.”

It is a good idea to understand this cold storage idea better, since it is ultimately the only safe way to truly store your cryptocurrency. Cold storage is actually the same thing as an “offline wallet”. It delivers the greatest possible security you can get with Bitcoin. All it involves is taking a BTC wallet and keeping it in a place that is secured by not being accessible to the Bitcoin network in particular or the Internet in general.

By employing the cold storage idea of an offline wallet along with high levels of encryption and backups of your Bitcoin wallet, you can sleep calmly at night, secure in knowing that a cyber-thief can not simply hack into your computer, smartphone, or even the Bitcoin exchanges to steal your BTC assets.

This can be done in two ways:

  1. Offline transaction signing – Two computers will each share a part of the wallet. The one can not be connected to any Internet or network. You simply keep your whole BTC wallet on this one and sign transactions with it. With the second computer, you can connect to the Bitcoin network, but only store an unsigned transactions wallet capability on it. Since your connected-to-the-network computer is unable to sign any transactions, no one can seize control of it remotely and steal your funds.
  2. Hardware wallets – Such devices are created to only function as a wallet. They can not receive any software programs. This makes them very impervious to cyber-thieves and computer weaknesses. They also allow you to back them up so that you are able to easily regain your missing BTC should the device become lost or damaged somehow.

Bitcoin as the “New Gold”?

Bitcoin offers a number of good reasons why you should seriously consider including it within your personal IRA as part of your retirement holdings. We look at a few of these below.

Bitcoin Has Similar Characteristics In Common With Safe Haven Standard Gold

Bitcoin has been called by some, “the new gold.” While you may or may not agree with this, it is safe to say that it does have a number of striking similarities to gold and the reasons why people like the precious metals. For example, just as the world's central banks have long had reasons to keep down the world gold prices which represent a challenge to their currency-printing authority, they feel similarly threatened by Bitcoin which they can not control or simply conjure out of thin air.

Evidence of national government attempts to restrict ownership of Bitcoin, just as some countries have attempted to restrict ownership of gold, already exists. India has put major restrictions on its gold-loving citizens' ability to purchase and hold the precious metal. China has similarly attempted to ban its citizens from transacting in Bitcoin in recent years.

When Bitcoin prices have fluctuated wildly over the years, government figures and central banks have not missed their opportunities to put down the crypto-currency as speculative, unreliable, and in an infant stage. They have also put down gold when its prices suffered setbacks, calling it a barbarous relic from the ancient world that has no place in any modern, thinking person's assets and portfolio.

Photo Courtesy of IBTimes UK

Gold also has a relatively small following among global investors as compared to mightier stock, bond, and paper markets, much as does Bitcoin. Although Bitcoin has gained media attention and public notoriety in recent years, Bitcoin is still in the early days of mass adoption even well into the 2020s.

Bitcoin vs. Gold

Bitcoin has several strengths versus gold, which it is often compared to by commentators and analysts:

  • Bitcoin is even more limited in quantity than gold – With totals limited to 21 million units. While gold can continue to be unearthed, additional Bitcoin units can not be mined beyond the maximum physically and technologically permitted total.
  • Bitcoin can be subdivided into smaller units than gold – Gold is both effectively and practically rarely subdivided beyond a tenth of an ounce (approximately 3 grams) in bullion form. Bitcoin can be owned, traded, bought, and sold in fractional amounts of even 0.01 BTC and smallerIn theory, BTC is infinitely divisible.
  • Bitcoin is digital – It can be easily spent anywhere in the world with the press of a few buttons on a desktop, laptop, smartphone, or tablet.
  • Bitcoin offers even more financial anonymity than gold – Offers at this point as the purchases and sales of Bitcoin are not effectively regulated within the United States and many other Western countries. This may one day change as the SEC tries to get involved, yet the Federal Reserve has recently admitted they can not possibly regulate the BTC transactions. The identity of the user behind the transaction is not known, only the transaction itself is publically available information.

Bitcoin vs. Stocks

  • There is a limitless number of stock shares – Which a company can create and float on the stock exchanges, while Bitcoin is limited to the maximum 21 million total coins, period.
  • Stock ownership can be diluted – Whenever a company decides to sell an additional stake in the company to a single or multiple large investors.
  • Stockholders are subordinated to bondholders and other creditors in the event of a bankruptcy event of a company – This means that the shareholders often get nothing by the time the creditors receive their share of the corporate assets. Bitcoin is not issued by any single company and so can not be diluted, since there are fixed and finite maximum numbers of Bitcoin in existence.
  • Stocks in particular and the stock market, in general, can be (and often are) dramatically impacted by macroeconomic, financial, industry-specific, and particular company news – All of these variables mean that stocks are very unpredictable. Bitcoin prices fluctuate solely based on supply and demand, where the supply is limited and fixed and demand is steadily increasing over time.

Bitcoin IRA Reviews

Now that you have learned about the pros and cons of BTC as well as how it compares with other more common investments, you might be wondering which custodian or BTC company to work with should you decide to invest in this asset type. We have conducted a review of the current Bitcoin IRA landscape.

Top Bitcoin IRA Company and Custodian

My Digital Money

MyDigitalMoney: This company offers a Bitcoin IRA that is held in a virtual wallet, which is the known traditional way to own Bitcoin. Although it makes it easier to spend your Bitcoin that way, it also makes it more vulnerable and hackable. Launched in 2021, MyDigitalMoney uses a multi-sig wallet to mitigate hacking issues. Still, a great option to consider when it comes to investing in BTC through your IRA, especially if you're thinking of starting with a smaller amount.

Best of all, MyDigitalMoney is located in the United States and has a perfect track record of security for its customers. They utilize military-grade security protocols to ensure that all assets are fully secured and insured, in partnership with their IRA custodian partner, Equity Trust Company. With low transaction fees (1.9%) and a simple, clean user interface, there's a lot to love about MyDigitalMoney whether you're a novice or expert-level crypto investor.

Bitcoin: A Great Investment Opportunity, But Do Your Due Diligence!

One of the key forces holding Bitcoin back from wider public adoption is its susceptibility to incredible price leaps and plunges. It has managed to rise or fall over 20 percent in only hours before. As we mentioned earlier, at one point it managed to lose billions in market value in only 48 hours.

This, however, is a function of the relatively tiny aggregate value for the whole Bitcoin market. Once the value and liquidity of Bitcoin grow sufficiently for its price to stabilize, erratic price movements should gradually subside, especially as its mass appeal and acceptability grow over time. For now, Bitcoin may make for a sound and forward-thinking IRA investment for those who can tolerate greater risk in their investment portfolios. To get started, consider contacting MyDigitalMoney today—America's leader in Bitcoin IRAs.

David Crowder
David Crowder

W.D. Crowder is an American published author. His background and areas of expertise include history, economics, expatriate living, international relations, investments and personal finance. A widely read and top of his class graduate of Stetson University, he obtained his bachelor of arts degree in History with minors in Latin American Studies and International Relations and a special emphasis in Economics. He was President of his Phi Alpha Theta (National History Honors Fraternity) Stetson University chapter and a Phi Beta Kappa (National Honors Fraternity) member.

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