To broaden their investments and achieve greater returns, a considerable number of investors are transitioning from typical IRAs (traditional and Roth) to self-directed IRAs (SDIRAs).
While the former limits investment to traditional assets like stocks, bonds, real estate, mutual funds, ETFs and certificates of deposit, the latter allows investment in non-traditional assets like cryptocurrencies, real estate, commodities and private placement.
Given how bitcoin, a type of cryptocurrency, has outperformed stocks — the traditional asset with the highest potential for growth — over the years, many investors are now considering including cryptocurrency in their self-directed IRAs.
For these investors, a bitcoin IRA presents an ideal chance to diversify their portfolio and achieve greater returns. However, due to the unpredictable nature of cryptocurrency, it is crucial to consider both the advantages and disadvantages in a comprehensive manner.
What Are Bitcoin and Cryptocurrency IRAs?
To begin with, it is important to understand the nature of cryptocurrencies. In simple terms, they are digital currencies that utilize blockchain technology to guarantee decentralization and anonymity.
Cryptocurrencies are produced through mining, a process accomplished by numerous individuals utilizing various computer systems worldwide, in contrast to fiat currencies such as dollars, pounds, and euros. This decentralized nature ensures that there is no central authority governing the supply.
A distributed ledger records all cryptocurrency transactions, with each transaction constituting a block that links to other blocks, forming a blockchain. An individual’s public key, comprising a sequence of codes, is used to represent them in a transaction while ensuring their identity remains anonymous. Given the public availability of transactions, both the involved parties and third parties can verify them.
Bitcoin and Bitcoin IRA
Despite the existence of a few cryptocurrencies prior to bitcoin, they failed to achieve success. Bitcoin, which was introduced in 2009, played a crucial role in opening doors for other cryptocurrencies. As per Coin Market Cap, the current value of the global cryptocurrency market stands at $2.14 trillion.
Initially launched as a form of digital currency, bitcoin gained traction among enthusiasts due to its fixed supply of 21 million BTC and lack of a central authority to manipulate this supply. This led many to perceive it as a valuable asset, as an increase in demand with a stable supply would consequently drive the price upwards.
Bitcoin’s adoption as a means of payment by the Electronic Frontier Foundation led to its ascent from $1 on February 9, 2011 to $1,237 in December 2013, thereby validating the beliefs of its supporters.
Since that time, numerous individuals have amassed fortunes from it, and the value reached its highest point at $68,789 on November 10, 2021.
According to SoFi, the price of it has grown by 4,738,468% since February 2011 when it was only $1. They state that it has been compounding at a rate of 100-200% per year.
During the same period, the S&P 500, comprising the 500 largest US stocks, experienced a growth rate of 250%. Presently, bitcoin boasts a market capitalization of $896 billion, surpassing only Apple, Microsoft, Amazon, Alphabet, and Tesla in terms of market value.
As a result, a growing number of investors are contemplating the inclusion of bitcoin in their self-directed IRA, giving rise to the concept of a “bitcoin IRA”. Essentially, a bitcoin IRA refers to a self-directed IRA that incorporates bitcoin within its investment portfolio.
What Are the Benefits of Bitcoin and Cryptocurrency IRAs?
Having grasped the fundamentals of bitcoin and cryptocurrency, let’s examine the advantages that entice investors to incorporate them into their SDIRA.
Advantages of Incorporating Cryptocurrency into a Self-Directed IRA
As historical evidence suggests, investors in bitcoin and other cryptocurrencies have the potential to enjoy exceptionally high returns. Despite bitcoin displaying more stability in 2021 than in previous years, according to Visual Capitalist, it still yielded returns of 59.8%, surpassing the S&P 500’s 26.9% return.
As a result, investors who are prone to taking risks can potentially gain higher returns when compared to conventional investments.
With data from Morningstar revealing bitcoin’s nearly non-existent correlation to the stock market, it has earned the moniker of “digital gold.” Similar to how investors have historically utilized gold to diversify their stock and bond portfolios, bitcoin has demonstrated a comparable attribute from 2012 to 2020, prompting many to consider it a means of diversification.
Recent data is undermining the argument for bitcoin as the digital gold, but investors still see value in using it as a means of diversification. Due to the newness of other cryptocurrencies, there has been limited research conducted on their potential for diversification.
El Salvador reached a significant milestone on September 7, 2021, by adopting bitcoin as an official currency. Numerous crypto enthusiasts expect a broader adoption of cryptocurrencies as a medium of exchange to be just around the corner. If this prediction comes true, the potential for cryptocurrencies in the future is immense. As a result, investors who do not want to pass up on this opportunity are contemplating including cryptocurrencies in their individual retirement accounts (IRAs).
What Are the Risks of Bitcoin and Cryptocurrency IRAs?
It is crucial to comprehend the risks associated with bitcoin and cryptocurrencies in order to make informed decisions, despite their advantageous aspects.
Disadvantages of Adding Cryptocurrency to a Self-Directed Individual Retirement Account (IRA)
Cryptocurrency prices exhibit substantial volatility, with the potential for both sharp increases and rapid declines.
On December 4, 2013, Bitcoin achieved a price of $1,237.55 but swiftly decreased to $697.02 within three days, experiencing a loss of 44%. Likewise, Bitcoin was valued at $12,913.28 on June 26, 2019, only to decline to $6,635.84 on December 17, 2019. This pattern has been observed in other cryptocurrencies as well. For instance, Ethereum saw a 40% drop between mid-November 2021 and January 2022.
Throughout the years, we have witnessed an abundance of hype and deception surrounding various cryptocurrencies, resulting in their eventual decline. These defunct currencies are commonly referred to as dead coins. Coinopsy, a website dedicated to cataloging such coins, categorizes dead coins as “cryptocurrencies that have been deserted, exploited for fraudulent purposes, with inactive websites, lack of network nodes or wallet complications, absence of social updates, minimal trade activity, or when the developers have abandoned the project.”
According to The Quartz Index report, it is not surprising that the website has 2,398 entries, with approximately 800-1000 initial coin offerings (ICOs) becoming unsuccessful by 2018.
According to Time magazine, crypto scammers caused a loss of approximately $14 billion in 2021. This poses a particular concern for cryptocurrency and bitcoin IRAs because the custodians of self-directed IRAs are not required to perform due diligence for their clients. Therefore, if you opt for cryptocurrencies, it becomes your sole responsibility to safeguard yourself against defunct coins and various scam tactics.
Self-directed IRAs with high fees typically include charges for initial setup, maintenance, and custody. Given the already high cost of cryptocurrency purchases, these additional fees can rapidly accumulate and become substantial.
Not all IRA providers provide self-directed accounts, and in addition to the challenge of locating a regular SDIRA custodian, there is the additional task of finding one that permits cryptocurrency purchases. The options are limited, making it potentially harder to negotiate for improved fees.
You are not allowed to make any transactions on your bitcoin IRA or cryptocurrency IRA that would benefit you personally, your descendants, or any business in which you hold at least a 50% stake.
Before making any investments, it is important to understand the complete information about prohibited transactions provided by the IRS.
How To Include Bitcoin in a Self-Directed IRA
After becoming aware of the advantages and drawbacks, it is up to you to make a decision. If you choose to proceed, there are certain measures you can follow to incorporate cryptocurrency into your self-directed IRA portfolio.
What is the process of incorporating cryptocurrency into your self-directed individual retirement account (SDIRA)?
To begin with, the establishment of a limited liability company, known as LLC, can be done under your IRA. When an IRA incorporates an LLC, it is referred to as a checkbook IRA. If you decide to go down this path, the following steps must be followed:
- Open a checking account for your IRA LLC.
- Use your IRA LLC name and tax number to open an account on a crypto exchange.
- Transfer money from the checking account to the exchange.
- Purchase the cryptocurrencies of your choice.
Instead of utilizing crypto exchanges for purchasing individual cryptocurrencies, you also have the option to register your LLC on platforms that facilitate the acquisition of crypto ETFs or trusts.
Another option is to buy cryptocurrencies via a broker, who will handle all the necessary tasks in exchange for a fee. Your only responsibility is to create orders that will be carried out.
The Best Bitcoin IRA Companies for 2023
BEST RATES AND FEES: iTrustCapital
- Account Minimum: $1,000
- Transaction Fees: 1% per transaction
- Insurance Protection: Up to $370 million
iTrustCapital offers convenient options for both beginners and experienced investors to begin a Bitcoin IRA, providing the advantage of expert advisors and clear pricing. This is why we consider it the top choice for competitive rates and fees in Bitcoin IRAs.
Account and trading fees are kept at a low rate.
$1,000 minimum investment
Trading takes place 24 hours a day, 7 days a week.
There are no financial advisors employed.
iTrustCapital, established in 2018, enables individuals to purchase and trade cryptocurrencies and physical gold in real-time via their retirement accounts. With the most competitive service and trade fees we have encountered, the company is ranked as the top choice for favorable rates and fees.
With iTrustCapital, trading and investing fees are extremely cost-effective. While it is typical for cryptocurrency trades to incur transaction fees of up to 15%, iTrustCapital only applies a 1% fee per transaction. There are no monthly charges or initial purchase fees, broker fees, or fees based on the magnitude of one’s assets. Moreover, new users receive a $100 Bitcoin incentive upon funding their accounts.
Clients of iTrustCapital have the option to engage in trading 29 different cryptocurrencies, such as Bitcoin, Ethereum, Litecoin, Bitcoin Cash, Ripple, and EOS, at any time of day or night via its round-the-clock transaction service. Opening an account requires a minimum of $1,000, and the minimum trade amount is set at $30. Additionally, iTrustCapital enables clients to diversify their IRA portfolios with gold, all while experiencing the same fee structure.
iTrust revealed its adoption of Coinbase Custody in June 2021 to safeguard its digital assets, which are protected up to $370 million. This supplementary measure complements the existing coverage starting at $50 million, offered by Munich Re, a reputable insurance-based risk solutions provider established in 1880.
BEST DIGITAL ASSET INSURANCE: Bitcoin IRA
- Account Minimum: $3,000
- Security Encryption: 256-bit SSL
- Insurance Protection: Up to $700 million
Bitcoin IRA is a provider that offers comprehensive services for Bitcoin IRA, including round-the-clock trading, a secure cold storage facility for digital assets, and insurance protection of $700 million.
Simple installation and trading
Offline digital asset storage that is secure.
Up to $700 million worth of digital assets are insured.
Expensive fees for setup and maintenance
Bitcoin IRA, which was founded in 2016, is the leading cryptocurrency IRA company that enables individuals to invest in cryptocurrency using their retirement accounts. The key features of the platform include user-friendly account setup and management, round-the-clock real-time trading, and high-level security measures.
In just a few minutes, users can easily create an IRA account and digital wallet with Bitcoin IRA’s app or web dashboard. Once funds have been transferred, trading can commence within three to five days, enabling users to engage in online buying, selling, and trading activities at any hour.
Bitcoin IRA allows trading of more than 60 varieties of cryptocurrency, such as Bitcoin, Ethereum, Cardano, and Litecoin. While the standard account necessitates a minimum opening deposit of $3,000, the company presents an alternative Saver IRA option. This Saver IRA only mandates an initial deposit of $100 and a monthly recurring investment of $100, facilitated via a linked bank account.
Bitcoin IRA places great importance on security. It provides a trading platform that utilizes 256-bit encrypted SSL technology, securely stores digital assets in separate offline cold storage accounts, and ensures protection for its digital assets with a coverage of up to $700 million.
Bitcoin IRA collects a custodian fee, a security fee, and a one-time service fee; however, individuals who want precise figures are advised to reach out to a customer service representative.
BEST FOR SECURITY: BitIRA
- Account Minimum: $5,000
- Security Options: Offline physical keys kept by armed guards and computer specialists in grade-5 nuclear bunkers
- Number of Cryptocurrencies Supported: 9
BitIRA is the leading choice for security, as it provides Bitcoin IRAs that are fully insured dollar-for-dollar for digital assets and ensures true offline cold storage of private keys.
Digital assets securely stored in offline storage.
Complete insurance coverage for digital assets.
Transactions can be encoded using a multi-encryption method.
It is necessary to establish accounts with a specialist in digital currency.
BitIRA, which was established in 2017, has gained recognition for its exceptional security measures in cryptocurrency transactions and storage. It has unlimited insurance coverage, solidifying its position as our top pick for security.
BitIRA ensures the security of transactions during their most vulnerable stage online by employing multi-encryption encoding. Once transactions are finished, they are transferred to offline physical keys stored within grade-5 nuclear bunkers, which are constantly safeguarded by armed guards and computer security experts.
BitIRA provides full coverage for all digital assets dollar-for-dollar, ensuring the complete value of client digital currencies. In addition to this, the company includes a consumer protection insurance policy worth $1 million to safeguard against instances of fraud or theft occurring internally.
In order to open an IRA with BitIRA, a minimum investment of $5,000 is mandatory, and customers must collaborate with a digital currency specialist. BitIRA offers the opportunity for clients to invest and engage in trading with nine distinct forms of cryptocurrency, such as Bitcoin, Ethereum, Ripple, and Litecoin.
The fees of BitIRA are not disclosed on its website.
BEST FOR SELF-DIRECTED INVESTMENTS: Equity Trust
- Number of Cryptocurrencies Supported: 8
- Annual Administration Fees: $75 to $2,640 (depending on account size)
- Account Setup Fee: $50
Equity Trust, with 45 years of experience in managing self-directed IRAs for both traditional and alternative investments, and no transaction fees, is ranked as the top choice for self-directed investments.
Having 45 years of experience dealing with self-directed IRAs.
Endorses both traditional and non-traditional investment options.
There are zero fees for any transactions.
Exorbitant charges for administrative purposes.
Accounts must be opened with a representative.
Equity Trust, a financial services company that was founded in 1974, ventured into self-directed IRAs (SDIRAs) in 1983. With their vast knowledge in both traditional and alternative investments, absence of transaction fees, and personalized guidance, Equity Trust remains our preferred option for self-directed investments.
To initiate an Equity Trust SDIRA, clients must directly communicate with a representative. Once the account is active, clients can engage in cryptocurrency trading, including Bitcoin, Ethereum, and Litecoin, with no charges and a settlement period of one day.
Equity Trust places a strong emphasis on security and implements a range of six security measures, such as multi-factor authentication, multi-encryption, and secure cold storage. Additionally, the company provides comprehensive insurance coverage for its digital assets.
Equity Trust provides clients with the expertise of SDIRA specialists to assist in account management, along with educational resources to enhance their understanding of investment options. Additionally, the company offers a client dashboard allowing them to conduct transactions, requiring them to provide instructions to an account specialist for investing their funds.
Depending on the account size, annual administration fees charged by the company range from $75 to $2,640, accompanied by a setup fee of $50. Additionally, a monthly cold storage fee of 0.07% is applied based on the account balance.
BEST INVESTOR EXPERIENCE: Coin IRA
- Cryptocurrency Account Minimum: $5,000
- Account Setup Fee: $0
- Security Options: Off-balance-sheet cold storage
- Cryptocurrencies Supported: Bitcoin, Ethereum, Litecoin, and more
Coin IRA offers educational resources on how to set up and finance accounts, along with its competitive fees, making it the top choice for a superior investor experience.
There is no longer a range of wallet options available.
There are currently no available cryptocurrency consultants.
Having been established in 2017, Coin IRA is our preferred option for the ultimate investor experience due to its affordable fees and focus on customer education.
Coin IRA provides a complimentary resource titled “How to Add Bitcoin and Other Cryptocurrencies to a Crypto IRA,” which enlightens individuals about the advantages of investing in cryptocurrency IRAs, converting current retirement accounts for cryptocurrency investments, and other related information. Following this, the company offers dedicated retirement experts in the field of cryptocurrency who can guide customers through the account setup procedure.
Coin IRA facilitates investment and trading activities involving various cryptocurrencies such as Bitcoin, Ethereum, Litecoin, and others. The assets are securely stored in cold storage, kept off the company’s financial records, and are registered under the name of Equity Trust, ultimately benefiting the respective account holders.
To start a cryptocurrency IRA with Coin IRA, a minimum investment of $5,000 is required, whether it is for opening a new account or transferring funds from a non-IRA account. The company assures that there are no charges for setting up the account, maintaining it on an annual or monthly basis, or providing insured cold storage for the digital assets of account holders.
It can be challenging to determine the firms that provide the best expertise, security, and support when it comes to allowing clients to include alternative assets such as Bitcoin in their IRAs. Ultimately, the companies that possess extensive knowledge in handling both traditional and digital assets are capable of safeguarding their clients’ retirement plans for the future.
Bitcoin IRA is the top choice when it comes to ensuring digital assets, while Coin IRA is our preferred option for providing the best investor experience. iTrustCapital excels in offering the best rates and fees, BitIRA stands out for its exceptional security measures, Equity Trust is the ideal choice for self-directed investments, and Regal Assets concludes our list by offering the widest range of supported cryptocurrencies.