Bitcoin, Ethereum, Litecoin, and others are all a type of “cryptocurrency,” which are digital-based money systems that allow people to safely send money across the Internet. These funds can be sent to others without a link to that person’s actual identity. The basis of Bitcoin is the public open source ledger that was set from the beginning to enable a finite number of bitcoins. Known as the “blockchain,” this ledger keeps track of all transactions through a process called “mining.” And since the blockchain is public, everyone involved in a transaction can ensure possession of transferring coins, and there’s no need for a third party (banks, financial intermediaries) to be involved.
What is a Digital Currency IRA?
In terms of overall legal structure, a digital currency Individual Retirement Account (IRA) is similar to any other type of IRA and helps investors save for retirement. It offers a tax-advantaged method for saving and earning returns towards retirement. This type of IRA is known as a “self-directed IRA” and can be set up as either a traditional or Roth IRA. Investors can also perform a digital currency IRA rollover from a 401(k) plan.
With a digital currency IRA, the investor is trying to achieve the same results as any other IRA – growth in the value of the cryptocurrency investment over time. The investor makes consistent contributions over time, and these are managed by the “custodian” of the account, which is simply a business that handles the actual holding of the investment.
Benefits of a Digital Currency IRA
Digital currencies, especially Bitcoin, are gaining widespread acceptance and can even be used in e-commerce transactions and in business fundraising. It’s an attractive way to conduct business because it’s fast and inexpensive to process. The rapid and continued adoption of Bitcoin increases its value as an investment within an IRA.
Bitcoin is also a way to diversify a retirement portfolio. Cryptocurrencies are independent of the value of the dollar and might increase in value if there’s a general downturn in traditional financial markets. This is because investors might move to Bitcoin as a safe haven investment during a recession. The value of Bitcoin is expected to rise along with its popularity, and with governments and businesses moving to regulate and approve usage of the currency, it’s very likely to gain broader acceptance.
Common Misconceptions about Investing in Digital Currencies
Besides the lack of understanding about what Bitcoin is, there are other misconceptions that are slowing down the investing public’s opinion of the cryptocurrency. There are security concerns with this digital currency, but it’s important to remember that other investments such as stocks and bonds are fundamentally digital as well. An online brokerage account is all based on digital transactions, and it does not offer the same levels of security as Bitcoin.
Digital currency IRA custodians use multiple layers of encryption to ensure the cryptographic “key” for a digital currency investment is safely kept. Additionally, it’s important to note that a digital currency IRA is actual property in the sense that it’s inheritable and the investment can be passed down to loved ones.
Another misconception is that Bitcoin is primarily used by criminals and that it might one day be shut down. Most criminal organizations prefer the complete anonymity of actual paper cash, and shutting down Bitcoin is an impossibility given its open structure and global reach. Truly shutting down the currency would involve somehow stopping the Internet, which of course will not occur.