In its eight years of existence, Bitcoin has dealt (and continues to) with skepticism, especially as its arrival challenged the idea of centralized authority. It brought with it a wave of cryptocurrencies. Regulators around the world have worked hard to frame appropriate guidelines. The response towards Bitcoin has been mixed, with some countrys banning it outright; a few embracing it; and the majority somewhat indifferent. Now, Bitcoin has earned acceptance and become more legitimate. It has created a niche for itself in the financial ecosystem. We take a look at how Bitcoins can be a part of an individual’s retirement portfolio, and should investors consider it. (Related reading, see: Bitcoin: Current And Future Legal Framework)
Although traditional investment vehicles continue to dominate the markets, the challenging financial climate has turned investors to look for alternatives. In recent times, fears of slowdown in the Chinese economy and events like Brexit led to many to flock around gold and bitcoins. This is not a new phenomenon; a report by McKinsey states that, “Global alternative investments across retail and institutional segments doubled in AUM between 2005 and 2011, to $6.5 trillion. This represents a compound annual growth rate of 14% over the period, far outstripping the growth of traditional asset classes.” This reflects that alternative investments are seen as a rescuer during crisis.
Although Bitcoin is relatively new among the available investment alternatives, it is fast rising in popularity and inching towards the mainstream. Interestingly, despite all concerns such as volatility in its price or ambiguity about its future, Bitcoin-related ventures have attracted huge investments and it has been endorsed by new partnerships with regular payment gateways. This is primarily because many believe that Bitcoin is similar to how the internet was in its initial years. Like all technology, it has a dark side to it (the internet dark web, for example). Among its advantages, Bitcoin offers a quick, cheap and efficient medium for transactions. It is becoming popular especially in regions which suffer from inadequate banking facilities. It is being used by speculators and investors to gain from price patterns and by many for making payments and transfers. According to a recent report, “In the Bitcoin network, for example, the average processing fee for a Bitcoin transaction is 0.04 cents, compared to more than 0.35 cents for a typical credit card transaction.” (Related reading, see more: Bitcoin Use Surges 33% a Month in Caribbean Amid Bank Flight)
Bitcoin has shown great power in times of financial chaos and is being viewed as a solid diversification instrument. However, its price volatility has kept many away from dipping their toes. But now, Bitcoins can be added to one’s retirement portfolio which can circumvent the issue of short-term price volatility while adding a new flavor to one’s portfolio.
The majority of individual retirement accounts or simply IRAs are managed by custodians or trustees for investors - mostly banks or broker-dealers and have stocks, bonds, mutual funds and certificate of deposits (CDs) as their investment vehicle. Examples of such accounts are traditional IRA, Roth IRA, Simplified Employee Pension (SEP) IRA, and Savings Incentive Match Plan for Employees (SIMPLE) IRA.
However, outside of these traditional assets, there lies great opportunity for diversification by purchasing and holding assets such as real estate, promissory notes, tax lien certificates, private placement securities, gold and even Bitcoins. Investors can take the route of self-directed IRAs through custodians and trustees. The process to add Bitcoins to your self-directed IRA is simple and fast. It involves opening a self-directed IRA through a secure e-sign application; then the new account is funded via a rollover or transfer. Finally, the investor needs to complete a Bitcoin allocation order. The regulations followed by self-directed IRAs are the same as regular IRAs, which means you cannot access your money until you are 59 ½ years old, or face a penalty for early withdrawal. However, self-directed IRAs place an investor in charge of his investment decisions. Edmund C. Moy Former Director, U.S. Mint and BitcoinIRA’s Chief Strategist believes that “Bitcoin puts the power to create money back into the people’s hands. Furthermpre, “…like gold, investing bitcoins in an IRA functions best as a small part of a balanced portfolio.”
Overall, the benefit of diversification, increasing risk appetite, the desire for higher returns and the availability of innovative products have drawn investors towards alternative’s such as Bitcoins and self-directed IRAs can be a good vehicle to get access them for longer-term with tax advantages. While a small exposure to Bitcoins for over the long-term via these self-directed IRAs can be a rewarding bet, investors must consider the speculative nature of bitcoins; rules and penalties that apply to self-directed IRAs; as well as the evolving nature of regulations towards virtual currencies before taking a plunge.