Bitcoin and other cryptocurrencies continue to reach all-time highs; integrating crypto into financial planning is a topic that is increasingly going mainstream.
As the cryptoasset marketplace, from non-fungible tokens, digital and crypto artwork, and (of course) cryptocurrencies continue to advance, develop, and gain wider traction, the financial implications of this growth are clear. While there might be some frothiness in some aspects of the crypto marketplace, the reality is that crypto has become part of the financial planning and investment process for individuals and institutional alike. One critical part of this conversation that remains a work in progress, however, is the ability of investors to gain access to investing products.
Buying and selling bitcoin or other crypto individually can certainly be an appropriate strategy, but what about other options?
Crypto exchange-traded-funds (ETFs) have not yet been approved in the United States, with Canada taking the lead in the North American crypto ETF market, but that does not mean that other products and options are off the table. Tactics and ideas that have rapidly become a definitive part of the bitcoin and crypto investing conversation is the ability of investors to utilize individual retirement accounts (IRAs) to gain some exposure to bitcoin. With the total IRA sector in the United States alone totaling trillions in assets, this is a potentially very large market and potential driver of growth for various cryptocurrencies.
A few of the specific service providers in the marketplace include, but are not limited to those mentioned here. Since this is such a new field, it is critically important for potential investors to perform due diligence, research the platforms and management teams, and realize that some providers in the space may not provide all the information investors expect. Always work with a financial professional familiar with both the crypto space, and specifics of the investment plan in question.
Before going any further, there is one importance caveat that needs to be mentioned; as of right now it is not possible to allocate bitcoin or other crypto into a pre-existing regular IRA that already hold stocks, bonds, and other assets. To be able to hold crypto in an IRA, investors will need to set up a different type of IRA known as a self-directed IRA (SDIRA). This is because, under current IRS regulation, bitcoin and other crypto are classified as property, which means that these financial instruments are unable to be included in regular IRAs.
Let’s take a look at a few factors to consider if and when investors are considering including bitcoin and other crypto into the financial planning process, and specifically the IRA conversation.
Roth or regular. Even though a special type of IRA needs to be established in order to successfully have crypto included as a part of the assets included in this tool, the same tax-related options exist. A traditional type of IRA, with tax-deductible contributions and withdrawals taxed, or a Roth IRA with no tax breaks on contributions but tax-free distributions, are both options on the table. Specific to the bitcoin space, if investors believe that the price per coin will continue to increase over time, this should be taken into account.
Niche providers. Since the current option to have bitcoin in an IRA is via a self-directed IRA, these accounts are more actively managed by the account holder, versus solely by a third party such as a money manager. In addition, since these tend to be specialized products, investors have to seek out providers that specialize in this area. There are numerous specialized custodians that focus in this space, and since each provider operates in a slightly different manner, it is important to perform due diligence regarding what will be provided to set up and manage these accounts.
Differences do exist. While IRAs are a term and idea that the vast majority of the investing and financial planning marketplace are familiar with, there are important differences that do exist when it comes to bitcoin IRAs. Clearly every product is different, but generally speaking there are higher fees with regards to setting up and maintain a bitcoin IRA compared to other IRAs. In addition, the investment minimums connected to these bitcoin IRAs can be higher when compared to other IRAs. When these two factors are taken into account, the cost of a bitcoin IRA might be significantly higher than initially thought.
Emerging field. Lastly, and even though these specialized providers may be referred to as custodians, they are not equivalent to other advisors focusing on more traditional products. For example, many of the bitcoin IRA providers are not necessarily overseen by regulators such as FINRA, nor as they necessarily SIPC insured. This, when combined with the self-directed (responsibility) for the investment decisions themselves, can result in bitcoin IRAs being higher risk than might otherwise be assumed.
As the bitcoin and crypto sector continues to mature, enter increasingly into the mainstream financial decision making process, and become more widely purchased by individuals and institutions alike, it would make sense that different investing products will catch up. That said, even a familiar idea and concept like an IRA can be more complicated that might otherwise be thought. As always, investing decisions and choices always carry risk, and when innovative financial instruments such as bitcoin are brought into the conversation, these risks can be both familiar and expected.