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Since the launch of Bitcoin in 2009, the cryptocurrency market has grown into a massive $2.4 trillion global industry. Bitcoin’s rapid rise from an underground cyberpunk project to one of the world’s most in-demand commodities has caught the attention of everyone from J.P. Morgan Stanley to regular mom and pop investors saving for their retirement. 

Cryptocurrency investing has taken the world by storm. However, many investors haven’t yet caught on to Bitcoin and are wondering what it is, and whether it’s right for them. And, given the blistering pace of the crypto industry, we can’t blame them. 

Fortunately, we put together this in-depth guide to cryptocurrency investing to help put your questions to rest. In this article, we’ll go over all the fundamentals of Bitcoin investing and crypto investing for regular investors, while putting an emphasis on retirement investors looking to capitalize on this exciting and lucrative asset class. 

What Is Cryptocurrency Investing?

Cryptocurrencies are digital assets that, like money, serve as a store of value and a medium of exchange. However, they have no physical properties and exist solely on a complex and cryptographically secure network of computers known as a blockchain

Like real money, we hold cryptocurrencies under the expectation that we can use them to purchase goods or services. Although many vendors do not (yet) accept cryptocurrencies, speculative investors purchase cryptocurrencies like Bitcoin on the assumption that one day we might be able to. 

If you’re bullish on Bitcoin, you might believe that one day cryptocurrencies will replace the global monetary system with a decentralized, peer-to-peer, internet-based system. If you’re a skeptic, maybe you think that government regulations will force the cryptocurrency industry to fold. Or, that people will lose their interest in crypto altogether, similar to the tulip mania bubble in 17th century Europe. 

The truth is, nobody knows for certain what the future of cryptocurrency holds. In this sense, many liken cryptocurrency investing to gambling, because there’s enormous upside potential, yet there’s also potential for the project to fail and lose its value completely. 

How Does Cryptocurrency Investing Work?

Put simply, investors purchase cryptocurrencies using fiat currencies (e.g., U.S. dollars, euros) on an exchange platform. There are many cryptocurrency exchanges based in the U.S. that offer low-cost, fully-insured currency exchange services. Below, we’ve listed several cryptocurrency exchanges ordered by global daily trading volume:

These platforms allow users to store their cryptocurrencies in a digital wallet accessible via an app or one’s web browser. Alternatively, users can transfer their cryptocurrencies to a private wallet. Every wallet holder is given a unique cryptographical key (called a “private key”) which is used every time one wants to transfer or use their cryptocurrencies.

However, cryptocurrency investors don’t have to go it alone. To simplify the cryptocurrency investment process, or to make sure you don’t lose access to your wallet, you can use a Bitcoin IRA company. 

These are trusted self-directed retirement account providers that specialize in helping add Bitcoin and other cryptocurrencies to traditional or Roth IRAs. (Yes, that’s right, you can add cryptocurrencies to your IRA—whether you already have an IRA, or want to open a new one.)

Cryptocurrency 101: Use Cases and Value Proposition

Unlike sovereign fiat currencies like the U.S. dollar or the euro, virtually all cryptocurrencies are decentralized, meaning no central bank, government, or single entity controls them. Therefore, how a cryptocurrency is made cannot be manipulated or tampered with, and their prices cannot be fixed—rather, buyers on the free market determine their prices. 

The unique decentralized properties of a cryptocurrency are what makes it so promising, but also so risky. Proponents of cryptocurrencies claim that Bitcoin and other cryptocurrencies will render banks and, above all, central banks obsolete. In doing so, the entire globe will have access to common digital currencies that can be sent across borders instantly, remittance-free. 

However, these benefits only scratch the surface of cryptocurrency’s potential. Below, we’ve listed some of the potential use cases and value propositions associated with Bitcoin and other blockchain-based cryptocurrencies:

  • Censorship and Confiscation Resistance: As decentralized digital assets, cryptocurrencies like Bitcoin cannot be confiscated by government authorities, nor can they be censored or easily suppressed.
  • (Hyper-)Inflation Hedge: When fiat currencies lose their value, investors flock to cryptocurrencies in search of stable ground. For example, during the height of the Venezuelan hyperinflation crisis in July 2020, Venezuelans purchased more Bitcoin than any other nation by global GDP-adjusted volume. 
  • Financial Anonymity: Blockchain-based assets like Bitcoin render your transactions anonymous. Although your blockchain node appears on a public ledger, it is not associated with your real name. 
  • True Peer-to-Peer Finance: Never in modern history have individuals had the means of transacting money for goods or services without an intermediary, such as a central bank or government mint. Cryptocurrencies enable individuals to make purchases or sales without restrictions or the involvement of any third party. 
  • Scarcity: Unlike fiat currencies, there is a mathematically fixed number of cryptocurrency tokens that will ever come into existence; therefore, their values cannot be artificially depressed by indefinitely printing more of it. 
  • Instantaneous Global Payments: Whereas wire transfers can take days to process, cross-border payments can be facilitated using cryptocurrencies in a matter of seconds.

Cryptocurrency Adoption: A Brief History

The first cryptocurrency was Bitcoin, which was technically launched in 2009 when its pseudonymous creator, Satoshi Nakamoto, published the Bitcoin white paper. 

The first known commercial transaction involving Bitcoin occurred on May 22, 2010, when 10,000 Bitcoin tokens (BTC) were used to purchase a pizza. However, it would take several years for the Bitcoin community to grow into an active peer-to-peer economy. 

Eventually, prominent new blockchain projects were launched. Known as “altcoins”, these non-Bitcoin cryptocurrencies serve similar purposes as Bitcoin and operate much the same way. Early examples of successful altcoins include Litecoin, Monero, and Ethereum. 

Today, approximately 15,000 popular vendors and retailers accept Bitcoin or cryptocurrency payments. These include companies such as Microsoft, PayPal, and Tesla. Sovereign governments, such as El Salvador’s, have even adopted Bitcoin as official legal tender.

Nakamoto, whose real-life identity has never been revealed, envisioned that Bitcoin would wrest control of global finance from elites and centralized institutions. For Nakamoto, Bitcoin would put financial autonomy back into the hands of everyday people. Amid widespread market instability and government scrutiny, it remains to be seen whether Nakamoto’s dream will materialize.

The Top 5 Cryptocurrencies by Market Capitalization

As previously stated, Bitcoin isn’t alone in the cryptocurrency ecosystem. Although it remains the largest and most well-known cryptocurrency in the world, there are many altcoins that are traded in massive volumes every day. As of September 2021, the largest cryptocurrencies by market capitalization (“market cap”) are as follows: 

  • Bitcoin (BTC): $856B
  • Ethereum (ETH): $358B
  • Binance Coin (BNB): $70B
  • Cardano (ADA): $68B
  • Ripple (XRP): $53B

Taken together, the top 100 largest cryptocurrencies combine for a market cap of over $2 trillion. While the cryptocurrency market has developed considerably over the past decade, it still pales in comparison to other globally traded commodities such as gold, which has a market cap of over $11 trillion

Bitcoin is often referred to as “digital gold”, given that they share many economic characteristics. By some expert accounts, Bitcoin is poised to one day replace gold as the world’s global reserve asset. Therefore, if this is to be believed, there is still plenty of room for growth as institutional capital continues to invest in cryptocurrencies as part of their diversification strategy. 

The Benefits of Cryptocurrency Investing

For many investors, the benefits of cryptocurrency investing are too tempting to pass on. Although this asset class certainly presents its share of risks, the unique benefits and potential upsides of cryptocurrency and Bitcoin investing are alluring to many risk-tolerant investors. Some of the main benefits of Bitcoin and cryptocurrency investing include:

  • Asymmetric Price Properties: The potential price ceiling of Bitcoin and altcoins is theoretically unlimited, whereas the value of Bitcoin has never gone to zero. Many investors believe that Bitcoin is a positively asymmetric asset, meaning that the probability of gains is more likely than the probability of losses. 
  • Disaster Hedge: Similar to gold, Bitcoin is considered a hedge against systemic collapse or other crisis events. Since Bitcoin and the U.S. equities market have a very weak correlation, Bitcoin is often seen as a viable alternative store of value when public confidence in the financial system or broader economy is low. 
  • Diversification and Risk Management: Risk-conscious investors shouldn’t put all their eggs in the same basket; to manage risk in a retirement portfolio, investors often diversify their holdings across a broad range of non-correlated. Bitcoin and altcoins are excellent diversifiers that can help lessen the risk of long-term retirement investing. 
  • Inflation Protection: As previously stated, cryptocurrencies cannot be artificially reproduced or printed. The fixed supply of cryptocurrencies such as Bitcoin makes this asset class a bulwark against inflation risks that are inherent to fiat currencies.

The “fear of missing out” (FOMO) is a powerful emotional response to a missed opportunity that can have a negative effect on our investment decisions. If you decide to invest in Bitcoin, do so for the right reasons. Rather than allowing FOMO to influence your decisions, first consider the real diversification and wealth-building benefits of cryptocurrencies. 

The Risks of Cryptocurrency Investing

Bear in mind that cryptocurrencies, as an asset type, have only been around for a little more than a decade. As a nascent asset class, they present unique risks that every investor must be aware of before getting involved in cryptocurrency investing. These risks include, but aren’t limited to, the following:

  • Regulatory Risk: As a relatively new asset class, there is a lot of uncertainty regarding how sovereign governments will regulate cryptocurrencies in the future. For example, the Chinese ruling party imposed several strict regulatory crackdowns in 2021, preventing Chinese nationals or entities from using popular cryptocurrency exchanges.
  • Volatility Risk: Make no mistake, cryptocurrencies are volatile assets whose prices can swing dramatically due to intra-day price speculation. Therefore, any cryptocurrency investor must be willing to weather the storm by tolerating large price swings—including both bull runs and crashes—on a regular basis.
  • Human Error Risk: There are horror stories of cryptocurrency investors losing their private wallet keys and, in doing so, losing access to millions of dollars worth of tokens. The risk of misplacing one’s keys, or accidentally sending tokens to the wrong recipient address, is inherent to independent cryptocurrency investing.
  • Forking Risk: If the majority of a cryptocurrency’s miners achieve a consensus to change the underlying blockchain protocol, a cryptocurrency can “fork” into an updated version. If a fork occurs, it could divide and polarize the coin’s community and cause a sudden price movement. 

To mitigate the risks of cryptocurrency investing, make sure that you never invest more than you can afford to lose. It also helps to ensure that you only dedicate a small portion (i.e., 3-15%) of your total personal wealth to cryptocurrency holdings. 

The volatility risk of Bitcoin and other cryptocurrencies cannot be overstated. Although the crypto market has seen incredible growth in recent years (with Bitcoin gaining a whopping +750% between January 2020 and April 2021), it has come at the cost of volatility. The chart below (Fig. 1) demonstrates the volatility levels of the top two cryptocurrencies, BTC and ETH, relative to the U.S. stock market (S&P 500) between 2020 and 2021. 

Figure 1. Source: CoinDesk

Even though your cryptocurrency wallet will always be under your own control, you can also lessen the risks of cryptocurrency investing by using a cryptocurrency IRA company. These firms are fully insured and highly vet each token they offer through their service. Consequently, the risk of human error is much lower when investing in this way, as are the chances of mistakenly investing in an unsuccessful or fraudulent altcoin. 

How to Safely Invest in Cryptocurrencies

Believe it or not, the words “safety” and “cryptocurrencies” aren’t oxymorons. As a whole, the cryptocurrency industry has come a long way since its inception, and there now exist many strategies for managing risk in one’s cryptocurrency portfolio. It starts with understanding the value of diversification

Diversifying with Cryptocurrencies

It bears repeating that cryptocurrencies are volatile assets that experience extreme cyclicality (i.e., irrational bull markets quickly followed by bear markets). As such, they’re not the kind of asset that you want the majority of your wealth concentrated in. 

Rather, cryptocurrencies such as Bitcoin are diversifiers that are best utilized when they comprise only a small portion of your overall wealth. Take, for example, Kevin O’Leary, a multimillionaire investor and co-host of the hit ABC series Shark Tank. Traditionally, O’Leary dedicated a safe and comfortable 3% of his personal wealth to Bitcoin; however, he has recently increased his Bitcoin allocation to about 7%.

For some, 7% of one’s net worth in Bitcoin and cryptocurrencies is too much. For others, it won’t be enough. How much of your portfolio you dedicate to cryptocurrencies should depend on your individual tolerance for risk, and how much you can afford to potentially lose. Those who are more risk-tolerant might want to consider dedicating as much as 10-15% of their wealth to crypto, whereas those with less to lose might want to stick around the 5% level.  

Appropriately Manage Risk 

These days, there are many stable and well-established cryptocurrency projects with enormous potential besides Bitcoin. For example, cryptocurrencies such as Ethereum (ETH) and Ripple (XRP) both have unique use cases, strong development teams, and active mining communities to support their burgeoning digital ecosystems. 

To better manage risk in your crypto wallet, consider investing beyond Bitcoin by diversifying across cryptocurrencies. Although it’s fine to commit the majority of your crypto holdings to Bitcoin, in the event that the Bitcoin price suddenly declines it may be useful to also store some of your wealth in alternative cryptocurrencies. 

This way, you might also capture some of the upside growth potential in these smaller coins that haven’t yet seen institutional capital pump their prices. 

Invest Through a Self-Directed IRA

If you’re going to invest in Bitcoin and other cryptocurrencies, it would be wise to do so through a self-directed retirement account, such as a Roth IRA or traditional IRA. 

Since cryptocurrencies arguably have much more potential for growth than most conventional investment vehicles, the last thing you’re going to want is to owe Uncle Sam long-term capital gains taxes (~20%) on your profits when you cash out. Holding your assets within a tax-advantaged retirement account is your best (and, frankly, only) way to lower your tax liability when investing in cryptocurrencies. 

Keep in mind, however, that most traditional brokerage accounts offered by the big retail investment firms (e.g., Vanguard, Fidelity, and Charles Schwab) do not support crypto. If they do, they offer a very limited selection of coins to choose from and place restrictions on the transactions possible. 

For truly independent and self-directed cryptocurrency retirement investing, you need to apply for an IRA through a third-party account provider that specializes in alternative assets. Some of the more well-known and most trusted cryptocurrency IRA providers include Broad Financial, and BitIRA

Bitcoin IRAs: Benefits and Costs

These days, more and more retirement investors are embracing Bitcoin in their IRA, 401(k), 403(b), or other tax-advantaged retirement accounts. However, not everyone is certain whether it’s the right investment decision for their needs.

To help our readers make a well-informed decision, we’ve listed the benefits and drawbacks associated with Bitcoin IRA or cryptocurrency IRA investing below. 

Benefits of Cryptocurrency IRA Investing

  • Tax-free (Roth IRA) or tax-deferred gains (traditional IRA)
  • Trade without triggering a taxable event each transaction
  • Prevent costly knee-jerk withdrawals in the event of a market downturn
  • Minimize overall tax liability leading to significant cost savings
  • FDIC insured deposits and critical customer support available from the account provider

Drawbacks of Cryptocurrency IRA investing

  • Opportunity cost given limited IRA contribution room (i.e., ~$7,000 per annum)
  • Effectively “lock-in” crypto investments over the long term
  • Early withdrawal penalties (10%) for those who take a distribution before age 59.5 years
  • Must start making withdrawals by age 72 or face penalties

How to Invest in Bitcoin and Cryptocurrencies

When it comes to cryptocurrency investing, investors have two main options through which they can invest: a self-directed IRA, or an exchange platform (i.e., non-tax advantaged). 

Those who are interested in building long-term wealth for their retirement might want to consider the former, whereas those who have already maxed out their IRA contributions or are more interested in short-term gains should consider the latter. 

Once you’ve decided which investment route you want to take, your next step is to select an exchange or an IRA provider. To help streamline the process, we’ve listed our top picks below for both categories based on their reputation, time in the market, and associated fees.

Top Cryptocurrency Exchange Platforms

If you have no interest in investing in cryptocurrency for retirement, you may want to simply invest through a cryptocurrency exchange. The exchange platforms listed below are some of the most widely used and trusted in the world, and allow users to convert fiat currencies into cryptocurrencies via credit card, debit card, or wire transfers. 

  • Coinbase (1.99% fee, plus additional $1-3 transaction fees)
  • Robinhood ($0.99 to $2.99 per trade)
  • Kraken (~0.3% fee)
  • Binance.US (0.1% fee; 4.5% fees on deposits with U.S. credit cards)
  • Gemini (1.49% + 0.5% convenience fee)

We feel obliged to reiterate that investing directly through a cryptocurrency exchange is risky. When you invest via an exchange, you are solely responsible for securely storing your cryptocurrencies and keeping your private keys readily available. There is no recourse available if you misplace your keys or cannot access your wallet for whatever reason. 

Top Cryptocurrency IRA Companies

Although there are many self-directed IRA providers on the market that support cryptocurrency investing, we specifically recommend the ones listed below. Due to their low fees, longevity in the market, and positive customer reviews, we suggest opting for one of these companies if you decide to invest through a cryptocurrency IRA. 

  • Bitcoin IRA: Best-in-class comprehensive insurance offered on all crypto holdings through Lloyd’s of London.
  • Coin IRA: Expansive catalog of altcoins on offer, including Ripple, Ethereum Classic, Chainlink, and Litecoin.
  • Broad Financial: Features one of the largest selections of crypto assets among self-directed IRA providers. 
  • BitIRA: Simply cryptocurrency IRA provider offering 24/7 crypto trading, all within an intuitive and visually appealing UI/UX.

Cryptocurrencies have a rightful place in many investors’ retirement plans. Those who want to capitalize on the long-term growth potential and risk management benefits of cryptocurrencies should consider opening a self-directed account with any of the providers listed above.

Should You Invest in Bitcoin and Cryptocurrency?

Whether you should invest in Bitcoin or other cryptocurrencies is a personal decision that must take into account the unique benefits and risks of this asset class. In many cases, as long as one invests responsibly, cryptocurrency investing is a good idea since it can help diversify one’s portfolio, manage risk, and, potentially, build considerable wealth. 

If cryptocurrency investing sounds right for you, you should consider investing through an IRA. This way, you can invest freely in any cryptocurrency of your choosing, benefit from full FDIC-backed deposit insurance, and lower your tax liability when it comes time to cash out.

To get started today, browse our exclusive list of the best Bitcoin IRA companies. There, you’re bound to find a company that offers affordable and secure cryptocurrency IRA services to provide you with the peace of mind you need to start diversifying with this promising asset class.  

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.