How To Put Bitcoin Into Your Retirement Account
Technology has changed how we manage our individual retirement accounts (IRAs). We no longer need to visit the offices of an investment firm to manage our accounts. We can do it comfortably from our homes.
What has largely remained unchanged since IRAs were introduced in 1974, are the types of investments we use to fund them. Until now, traditional forms of funding have included stocks, bonds, certificates of deposits and physical assets with value.
However, the world of investing is changing. Our world is becoming increasingly digital with each passing day, with a large portion of our lives now taking place online. It stands to reason that a digital currency and investment option would be ready to change the landscape.
What Is Bitcoin?
Bitcoin is a digital currency that exists on a blockchain, a public ledger, on the internet. As the public ledger uses cryptography to secure transactions, it is also a cryptocurrency.
No central authority, like a bank or government, updates the blockchain ledger. In place of a central authority, computers run the bitcoin core software in a peer-to-peer network and manage it through consensus.
The process of finding consensus on the status of the shared public ledger is known as “mining”. Every ten minutes, computers in the network compete to find a solution to a mathematical problem the bitcoin protocol provides.
The winning computer updates the ledger for ten minutes. It also keeps the new bitcoins released within that time—12.5 bitcoins.
A software developer by the name (or pseudonym) of Satoshi Nakamoto released the first version of bitcoin core software in January 2009. The first release came three months after Nakamoto published a white paper in a cypherpunk mailing list describing how the technology would work.
No individual, company or institution owns the bitcoin protocol as it is an open-source project. Software developers all across the world contribute to its improvement.
A complex ecosystem of mining operations, wallet services, exchanges and investment platforms has grown around bitcoin. Close to $2 billion has been invested into companies and startups offering related services. The cryptocurrency has grown to about $38 billion in market capitalization.
Bitcoin was the first cryptocurrency ever created. Since its creation, more than a thousand others have come into existence. All cryptocurrencies work with the same concept and technology, but have a wide range of differing features and use cases.
Over 150,000 merchants worldwide accept bitcoin as payment for goods and services, mostly through payment processors like BitPay. Users can even use the cryptocurrency to shop on Amazon through the payment exchange Purse.io.
Bitcoin has the potential to be a unit of account. Individuals and organizations can use it to measure and track the worth of assets, price, expenditure and income. At the moment, the majority of users find it convenient to denominate items in fiat currency when using bitcoin.
The most popular use of bitcoin however is as a store of value. It is convenient for remittances, as it moves fast across borders. It is also a popular long-term investment asset.
Its price has grown from zero to above $3000 in a span of eight years. Someone who bought $400 worth of bitcoin in 2011 is worth over $1 million in 2017.
Advantages of Bitcoin as an Investment
Bitcoin’s supply is capped. There will never be more than 21 million in circulation. The number coming into circulation diminish when the new supply halves every four years. The network will mine the last coin in the year 2140. The deflationary nature of bitcoin has earned it the tag ‘digital gold.’
Meanwhile, the adoption of bitcoin is growing around the world as shown by each transaction the network confirms. The daily average was about 50,000 transactions in 2013. That number has risen to about 320,000 in 2017.
The diminishing number of new bitcoins coming into circulation, combined with expanding worldwide adoption, creates an environment for its value to continue to grow.
Another advantage of bitcoin as an investment is that you can hold it independent of a custodian. This gives you full control over your holdings and protects you from third-party mismanagement or fraud.
You can have full control over your bitcoins even when you use custodial services through multisignature wallets. The infrastructure allows for a wallet to have two or three separate private keys. All keys are needed in order for an authorized transaction to take place. A secure wallet provider like Bitgo keeps each key in a separate “cold storage” (or offline away from the internet) locations to ensure maximum security.
Bitcoin exists independently from assets such as stocks, savings and bonds. During an economic crisis, bitcoins do not fall in value with the rest of assets, but rather, they have historically increased in value in an inverse relationship.
Is Bitcoin Allowable by the IRS as a Retirement Asset?
Bitcoin is less than ten years old and most regulators around the world have not conclusively taken a position on the cryptocurrency. The USA is one of countries that have issued guidelines on its use.
In March 2014, the Internal Revenue Service (IRS) declared it would treat bitcoin as a commodity for taxation purposes, the way it treats stocks and bonds. The IRS has declared that Bitcoin will be regarded as a “property” and will thus require a custodian in order to comply with regulations.