Considering Bitcoin for your IRA or 401k? Read this first…
What Exactly is Bitcoin?
Bitcoin refers to the now world-famous digital, or crypto-currency, which was only recently created back in 2009. It was originally developed by the (as of yet still unknown) individual Satoshi Nakamoto, a brilliant computer programmer who laid out the ideas for it in a white paper. The new crypto-currency rapidly gained in popularity over the years because it originally pledged to provide more competitive transaction fees than those offered by typical rival online means of payment. It also is run by a decentralized and non-governmental authority, the opposite of legal tender currencies.
One of the great advantages which bitcoin balances possess is that they are maintained with private and public security “keys.” These keys prove to be incredibly long strings of letters and numbers which are linked together in a mathematically based encryption by the algorithm which originally created them. It is this public key which works much like a bank account number in a transaction. The private one functions more like your ATM card PIN number and is a critically important secret you only share when you are giving final authorization on a transaction and bitcoin transmission.
Bitcoin was long considered a highly speculative investment. The truth is that it still is. This is why individuals are well warned not to take all of your life savings, or money which you need to live on, and plow them into the BTC (standard bitcoin abbreviation). You must be prepared to weather sudden large gains and losses in their value for now. There is a window of opportunity to invest in these pioneers of the crypto-currencies for the longer term, as they are an idea whose time has finally come. Read on to better understand what is involved with an investment in Bitcoin.
Why Should You Consider Investing In Bitcoin Long Term?
There are actually a number of smart and sensible reasons to stake out your position in Bitcoin these days. We consider five of them here.
Bitcoin is Changing The World We Live In
Do not simply take my word on these claims detailed here. Consider what the experts say on the matter. Peter Thiel, the Co-Founder of Paypal claims that:
“I do think Bitcoin is the first encrypted money that has the potential to do something like change the world.”
The means of paying for transactions online is not new. Credit cards have permitted you to do this since the 1990s when the Internet became widespread. PayPal has existed and thrived for some time now. The unique function of BTC is that it allows you to store value in it as well as to securely pay for transactions across borders and different currency jurisdictions throughout the world. This is a powerful combination which does not appear like it can be stopped at this point.
Bitcoin Is Truly International And Exists Beyond The 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 that:
“The Federal Reserve simply does not have the authority to supervise or regulate bitcoin in any way.”
This is because the United States 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 something entirely different. This is why the central banks of the European Union (ECB), U.S. (Fed), Switzerland (SNB), and others do not have either jurisdiction or regulatory authority over BTC.
Bitcoin Has Tremendous Power As An Online Currency That Can Not Be Duplicated
Part of what makes Bitcoin so powerful is that it is a brilliant concept as the gold standard for online currencies. Eric Schmidt, CEO of Google informs you that:
“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 Can Not Be Stopped, Even by Governments of the World
There are countries of the world, like China, which have tried to halt the advance of crypto-currencies and especially bitcoin. John McAfee, founder of McAfee, 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 business and individuals have accepted it for transactional payment without a government backing it makes it the first true currency of the people. You can not stop the power of the people when they put their collective minds behind a method of exchange.
Bitcoin Is Now Approved By The IRS As A Form Of Currency
Observers of the crypto-currency trend waited with baited breath to hear what the important national taxing authorities like the IRS would decide about Bitcoin. They reinforced the concepts behind it when they finally issued a statement on the BTC phenomenon. The Internal Revenue Service says about Bitcoin that:
“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.”
While they do not go so far as to tax it as a currency, that is probably more a decision to treat it in such a way that they can tax any gains made on it more ruthlessly.
The Pros and Cons of Bitcoin
- 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 & bonds, just like gold does. This is one of the reasons it is becoming incrementally more popular over time
- Bitcoin could be significantly undervalued – in comparison to gold, at the moment a single Bitcoin is trading nearly on par with an ounce of gold. The fact that there are and will always be far fewer Bitcoin units than there are ounces of gold in the world means that the price could go exponentially higher over time
- More and more people and businesses are using Bitcoin – see the bitcoin transaction table below:
- The currency is sometimes wildly volatile – On January 5th of 2017, the currency dropped almost 20 percent in a matter of 40 minutes because of Chinese capital controls that allowed for a rally in the Chinese yuan. China is a huge user of Bitcoin as the people try to find ways around their government's limits on moving money overseas. Besides this, the holders of yuan have decided to utilize this crypto-currency for a store of value and a hedge.
- 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 this 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 Do You Need To 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 exchanges 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 (in fact either a physical or online bank). This is why you ultimately need to use a physical Bitcoin wallet. 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.
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?
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 digital crypto-currency. Cold storage is actually the same thing as an “offline wallet.” It delivers the greatest possible security you can get with Bitcoin. All that this involves is taking a BTC wallet and keeping it in a place which 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 the knowledge that a cyber-thief can not simply hack into your computer, smartphone, or even the Bitcoin exchanges and network to steal your BTC assets.
This can be done most effectively in two ways:
- Offline transaction signing – means that 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.
- 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.
Why Consider Bitcoin for your IRA?
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 personally 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.
Evidences of national government attempts to restrict ownership of Bitcoin, just as some countries have attempted to restrict ownership of gold, already exist. 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.
Gold also has a relatively small following among global investors as compared to mightier stock, bond, and paper markets, much as does Bitcoin. The number of people who have realized that gold is never a traditional asset equivalent (but rather a store of wealth in drastically changing times) is under one percent. Bitcoin, while clearly up and coming, is also a part of the portfolio and plans of a tiny number of global investors and individuals.
As central banks exhaust their abilities to keep the world economy afloat, you may see still more governments and central banks attempting to do battle with the crypto-currency. Yet even as they have failed to stop and limit gold over the last over forty-five plus years, they will find that defeating a digital currency that is at once everywhere and in no central single location is next to impossible.
Bitcoin Has At One Point Surpassed The Value Of Gold
Though the original Bitcoin from 2009 started out life valued at under a tenth of a penny, the value of it in early March 2017 attained a record all-time high of approximately $1,293. At this point, it had become more valuable than gold for the first time ever (though not worth more than the all time high of gold at over $1,900 per ounce) since gold was trading for $1,226.89 at that point in time.
The dramatic surge in value came down to an SEC consideration of the world's first Bitcoin exchange traded fund. Tyler and Cameron Winklevoss had filed this ETF application at the SEC four years earlier. It promised a greater amount of liquidity and credibility for Bitcoin.
Over The Longer Term, Bitcoin Has Tremendous Potential To Grow in Value
Again you should not take the word of just any person with this idea. People such as Kim Dotcom, the founder of Megaupload, have stated that the “Bitcoin price will hit $2,000 in two years.” Even if Kim is wrong about his short-term timeframe, he is definitely onto something about the future price increase potential of the ultimate digital crypto-currency.
Bitcoin Versus 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 .01 BTC and smaller. In theory, BTC is infinitely divisible.
- Bitcoin is digital – so 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 the 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 Versus 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 bond holders 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 a fixed and finite maximum numbers of Bitcoin in existence for all time
- Stocks in particular and the stock market in general can be (and often are) dramatically impacted by macro-economic, financial, industry-specific, and particular company news – all of these many variables mean that stocks are very unpredictable in reality. Bitcoin prices fluctuate solely based on supply and demand, where the supply is limited and fixed and demand is steadily increasing over time (with occasional short term setbacks)
For the moment, the thing most holding back bitcoin is its susceptibility to awe-inspiring 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 $3 billion in market value in only 40 minutes.
This is a function of the relatively tiny aggregate value for the whole Bitcoin market. Once the value and liquidity of Bitcoin grows sufficiently for its market cap to be greater, this should gradually subside, especially as its universal appeal and acceptability grows over time. For now, it makes a sound and forward-thinking IRA investment, provided you are invested for the long term. This is actually true of both Bitcoin and gold.