An Individual Retirement Account (IRA) is a specially designed investment-savings account with tax advantages. Essentially, there are annual limitations on taxation and account fund contribution.
Due to IRAs being long-term retirement accounts, assets cannot be withdrawn before the age of 59 ½. In case of early withdrawals, there are significant penalties.
This article will examine two specific types of IRAs, Bitcoin and Gold, to help you better understand your investment options.
What is bitcoin, and how is it valued?
Bitcoin (BTC) is a decentralized digital currency that you can exchange, buy or sell without dealing with an intermediary. Since central banks or governments do not issue the token, its value is determined by other unconventional factors such as:
⦁ Current supply and market for BTC
⦁ The cost of producing the token through the mining process
⦁ Other competing crypto tokens
⦁ Surrounding regulations for its use and sale
⦁ Current media opinion
All BTC transactions exist on a publicly accessible ledger, making them difficult to fake or reverse.
What is a Bitcoin IRA?
It's a type of self-directed retirement account. Self-directed IRAs let you invest in alternative assets such as precious metals, cryptocurrencies, etc. A standard IRA doesn’t allow that, restricting investments to stocks, bonds and mutual funds.
Note that despite carrying the name ‘Bitcoin’, these IRA accounts also allow investments into other cryptocurrencies. Some examples include Ripple (XRP) and Ethereum (ETH).
What are the benefits of a Bitcoin IRA?
Owing to the intrinsic nature of cryptocurrencies, Bitcoin IRAs offer advantages such as:
⦁ Reduces traditional market impact on portfolio
Crypto tokens are not related to traditional markets or securities such as stocks or bonds. These digital assets are volatile but otherwise unaffected by conventional trade or market crashes.
So, fluctuations or downward trends in regular asset classes will not significantly impact your overall portfolio.
⦁ Potential for high returns
Bitcoin and other digital currencies are very volatile in terms of valuation. However, this also provides the possibility for high investment returns. For example, in March 2020, BTC was valued at approximately $5000. By the end of 2020, BTC's valuation was around $30,000.
So, despite the risks, crypto tokens have a massive potential for returns, especially if you invest a fractional amount of your IRA's overall value.
Moreover, cryptocurrencies are projected to grow in popularity in the future. In that case, the valuation of such tokens could skyrocket.
What is gold, and how is it valued?
It's a type of precious metal. More important than the definition of gold is how its value is determined. Some of the factors that are used to decide the value of gold are:
⦁ Price and demand for other commodities
⦁ Production costs
⦁ Inflation in the US and the Global economies
⦁ US Interest rates in comparison to wages and inflation
As such, the London Bullion Market Association sets the gold price daily. It's set twice a day in USD, once at 10:30 am GMT and again at 3:00 pm GMT.
What is a Gold IRA?
Gold IRAs are specialized retirement accounts that let you hold approved investments in gold and other precious metals. It functions the same way as a standard IRA, except you hold physical bullion bars or coins instead of paper assets.
Essentially, it's a self-directed IRA that needs to be managed by a custodian, i.e. a brokerage firm or a bank.
What are the benefits of a Gold IRA?
Some of the benefits that Gold IRAs offer include:
⦁ Protection against reduced purchasing power
Gold is considered the king of precious metals. It's an inflation hedge, meaning it’s an investment protected against reduced purchasing power. When you invest in precious metals through a Gold IRA, you mitigate the risk of inflation eroding the final value of investment returns.
For example, you invest $10,000 on stocks today. Five years later, that investment gives you a return of $50,000. That amount looks good on paper but is a reduced return considering it doesn't have the purchasing power it did 5 years ago.
⦁ Stable Profits
It has historically been a stable investment that gives incremental profits. For instance, an ounce of gold was valued at $200 in 2000. By the end of 2017, it finished at $1200 an ounce. So, people who bought gold in 2000 had a 5x return on their investments.
That may not seem like a lot, considering the timespan. However, none of those early 2000s investors faced significant risk at any time.
What are the key differences between a Gold IRA and a Bitcoin IRA?
The differences boil down to the asset type. Primary distinctions between the two assets can be consolidated into the following categories.
⦁ Regulatory policies
The system for trading, tracking, and determining the value of gold is flawless. Global regulations surrounding the precious metal are also stringent. When investing in precious metals through Gold IRAs, you will only be able to buy from registered brokers and dealers.
Bitcoin and other crypto tokens are similarly monitored and regulated. The difference is that cryptocurrencies are monitored publicly, not by a central authority. Additionally, the lack of government regulations and policies deters some investors.
⦁ Scope of utility
Currently, crypto tokens are limited in their use and scope. They serve as a digital currency and are a speculative option for investment.
However, emerging technologies like FinTech are looking toward cryptocurrencies to decentralize financial transactions. That could prove to be a significant contributor to its growth in the future.
On the other hand, gold has several applications in different sectors, such as technology and luxury goods. This flexibility in terms of utility has enabled gold to have a consistent value compared to other assets.
Precious metals are highly liquid assets, meaning they can be quickly sold. If you need to relocate parts of your portfolio during a crisis, there's no better option than gold.
Bitcoin can be considered liquid, but there is a caveat. Most cryptocurrency exchanges, such as Coinbase have a daily limit on transactions and withdrawals. So, if you own several tokens, it can be challenging to liquidate the entire portfolio in one go.
Cryptocurrency is definitively more volatile than gold. External factors such as media opinion and speculative sentiments can send BTC value in either direction. These factors are not relevant when determining gold value.
However, several alternative tokens called ‘stablecoins' have become prominent now. These coins are linked directly to a fiat currency and, thus, provide some semblance of stability. Tether (USDT), linked to the US dollar, is one example.
What are the benefits of investing in a Bitcoin IRA over a Gold IRA?
The two most prominent advantages are related to returns and future growth.
While cryptocurrency is volatile, its fluctuating nature allows for potential massive returns. For example, BTC started 2021 at a valuation of $32,200. The price rose to $69,000 before closing the year at $46,200. Even with that reduced value, you stand to gain much more with BTC than you would with a Gold IRA.
Additionally, cryptocurrency is being hailed as the next big thing in global financial digitization. Blockchain technology is well-positioned to take over global economic systems as the world moves towards cashless transactions and verified financial ledgers.
How do you set up a Bitcoin or Gold IRA?
The setup process for both Bitcoin and Gold IRAs is similar due to both being self-directed accounts. It's vital to note that such accounts can be either Roth or traditional IRAs.
In a Roth account, you pay taxes when contributing the funds. In a traditional account, the taxes are paid at the withdrawal time. With that out of the way, the steps to setting them up are as follows:
⦁ You open a self-directed IRA account with a chosen custodian: Custodians are financial entities responsible for managing your account. Some custodian responsibilities include transferring funds, purchasing the directed asset and asset storage.
⦁ Select Your Assets and Dealer: You must deal with registered brokers or sellers for gold. For Bitcoin and other crypto tokens, you can use an exchange platform or a private facilitator.
⦁ Fund your transaction with the necessary amount: You can directly deposit cash or rollover an existing distribution from your other retirement accounts. You also have the option of directly transferring funds from conventional bank accounts.
The only remaining thing to do is to build on your investment consistently.
Evaluation of Bitcoin and Gold IRAs during inflation and recession
Gold has always been one of the strongest assets in times of recession or inflation. Historically, prices for stocks and other commodities always fall during market crashes. Gold, however, has never had this problem due to its price elasticity.
A strong case in point is the housing market crash in the 2000s, with gold prices peaking back then.
Similarly, BTC and other crypto tokens are seen as potential inflation hedges. These assets are not tied to real-world currency and have no co-relation with fluctuating inflation levels.
Another reason why BTC is not affected by inflation is in the way it’s supplied. Currently, there are 21 million BTC tokens in public circulation. The amount of BTC mined is reduced by half every four years. Thus, its scarcity influences its value more than conventional economic factors.
However, both assets are negatively affected by increased interest rates, as evidenced by the current US Federal Government policies.
Gold and Bitcoin IRAs are extremely safe long-term investment options. The key here is ‘long term'. Note that both assets will sometimes fluctuate if US interest rates go up. However, since an IRA is meant for prolonged investment, that shouldn't be much of a concern.
To ensure the best returns for yourself, follow the rule of ‘stable/speculative' and ‘unstable/secure'. In times of stable economic situations, invest in Bitcoin IRAs. Conversely, when the financial situation is uncertain, go for Gold IRAs. Gold has a longer history of surviving through numerous financial collapses, recessions, and depressions.
For those who want to invest in both crypto and gold in a single IRA, Bitcoin IRA retirement platform as well as iTrustCapital, a leading IRA provider of alternative assets offers investors that option.
How is a Bitcoin IRA taxed?
The Internal Revenue Services considers Bitcoin and other crypto tokens ‘property'. Under Notice 2014-21, profits on the purchase of ‘property’ cannot be taxed while using an IRA or 401(k).
Who manages Bitcoin IRAs?
Financial organizations such as banks and brokerage firms manage and act as Bitcoin IRA custodians.
What are the risks of a Bitcoin IRA vs a Gold IRA?
The most prominent risk factor of a Bitcoin IRA lies in its volatility. Comparatively, Gold IRAs are stable options.
Where can I find more information about Bitcoin IRAs?
There are plenty of resources online that explore Bitcoin IRAs in detail. You should use only legitimate academic sources to understand the concept better.
Risk Disclosure: Any investments come with an inherent risk, where you could end up making less money than what you put in. Before investing your hard-earned cash, be sure to speak with licensed professional financial advisor first. Always remember that past performance is not an indication of future returns.
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