You might have come across the growing trend of young investors allocating funds to cryptocurrencies within self-directed IRAs. While this investment strategy has gained traction, it might not be the most suitable choice for everyone.
For example, last year, bitcoin prices fell 65% (although they have rebounded), and other cryptocurrencies like Ethereum and Dogecoin displayed significant volatility.
As a result, many experts now argue that Bitcoin may not serve as a reliable inflation hedge like gold. In this blog post, we will explore four key reasons why you should think twice before investing in a crypto IRA.
Cryptocurrencies Are Not Government-Backed
Many people believe that cryptocurrencies are backed by something like gold or fiat currency. However, this is not the case. Instead, cryptocurrencies are primarily based on computer code with no inherent value. Some people who have successfully opened self-directed IRAs have been confused into thinking that they can now use a traditional IRA to invest in coins with some backing.
Moreover, cryptocurrencies are not backed by the U.S. government, the central bank, a national or international organization, or another asset. Instead, their worth is strictly determined by the value that market participants place on them through their transactions. Consequently, there is no regulation or oversight of cryptocurrencies and no guarantees that tokens will maintain their value.
On the other hand, gold is the most stable currency worldwide and has proven to maintain its value over the long term. Moreover, gold has historically been an excellent hedge against inflation because its prices rise when fiat currency loses its purchasing power, and the stock market plunges.
There Are Currently Few Regulated Crypto Exchanges
Many investors who want to open a self-directed crypto IRA wish to do so to buy tokens on a regulated exchange. While an increasing number of crypto exchanges are beginning to register with the Securities and Exchange Commission (SEC), there are currently few regulated exchanges that will allow investors to buy tokens with their traditional IRA funds.
While purchasing tokens with a credit card or bank account is possible, this method is not ideal. For example, not all credit card companies allow their clients to purchase cryptocurrency. Also, not all cryptocurrency exchanges accept credit cards. They may charge high fees for every purchase and service if they do.
Moreover, most credit card issuers consider crypto purchases as cash advances, similar to withdrawing money from an ATM with your credit card. As a result, you may be charged around 4% of the amount. You may also be charged with higher interest rates than regular purchases. Lastly, making a big purchase may hurt your credit utilization and leave negative marks on your credit score.
In addition, cryptocurrency is decentralized, meaning that investors trade them in on a peer-to-peer marketplace without an intermediary to facilitate transactions. As a result, decentralized exchanges may lead to security issues.
For example, anonymously trading may cause a lack of accountability and expose investors to scammers. Moreover, the decentralized nature of crypto lacks safety against possible market crashes because of the absence of federal regulations to protect investors.
Cryptocurrencies Are Highly Risky
Cryptocurrencies are highly speculative and risky because there is no regulation or oversight. This means there is no guarantee that the value of a token will maintain its current price. In addition, because there is no regulation, many investors are worried about the security of their investments.
In addition to the limited and unpredictable regulatory environment, many experts suggest that cryptocurrencies are still immature and may suffer many pitfalls. These may include volatility and erratic price movement, cyber theft, and fraudulent exchanges. Nonetheless, investors may be able to reduce the risk of theft and hacking if they work with strict cold storage protocols with custodians.
However, given the volatility of the asset, it is best to avoid investing in a Bitcoin IRA if you have an investment horizon of fewer than five years. It could delay your retirement and cost you a sizeable chunk of your savings.
Some Crypto Investments Are Prohibited in an IRA
The Internal Revenue Service (IRS) has strict rules regarding which investments are prohibited in an IRA. Consequently, you may risk losing your account’s tax-deferred status if you are not careful and break any laws accidentally.
On the other hand, rules and regulations concerning gold IRA are crystal clear. Investors must choose from a list of IRA-eligible precious metal coins and bars, such as the American Buffalo and the Canadian Maple Leaf.
You May End up Paying High Fees
Another reason experts warn against investing in cryptocurrency through a self-directed IRA is that they are risky and expensive to maintain. For example, self-directed IRAs usually require a custodian, and the costs can be high due to the additional compliance and IRA requirements.
In addition, high fees associated with crypto investments also include the initial setup fees, trading fees, and annual maintenance fees. The charges depend on the custodian. Moreover, each cryptocurrency trade incurs its own set of costs. For example, a typical exchange may charge around 3.5% per transaction for each purchase and a flat fee for each sale of crypto assets.
Also, remember that premature withdrawal may also result in high fees, which could negate the tax advantages offered by the IRA account.
During these volatile times, gold seems to be a better investment than Bitcoin and other cryptocurrencies.
However, cryptocurrencies are still no substitute for gold or any government-backed currencies during times of crisis. This means there is little reason to invest in a crypto IRA as they are not regulated, risky, and costly. Instead, consider investing in a gold IRA to grow wealth and protect yourself from inflation.
What Are the Risks of Cryptocurrency?
The dangers of cryptocurrency are mainly related to its volatility. Any unexpected change in the market can lead to sharp and sudden moves in price. Moreover, they are susceptible to hacking and scamming as digital currency.
Is Cryptocurrency Legal?
Despite its use, there are still no uniform international laws that regulate cryptocurrencies. Nonetheless, not every country allows its citizens to trade them. For example, bitcoin is legal in countries such as the U.S., Canada, Australia, El Salvador, Mexico, the UK, Denmark, Spain, France, Germany, Iceland, and Japan.
On the other hand, some countries have implicit bans on specific cryptocurrencies. These countries include Bahrain, Burundi, Cameroon, Central African Republic, Gabon, Georgia, Guyana, Kuwait, Lesotho, Libya, Macao, Maldives, Vietnam, and Zimbabwe.
Finally, countries with absolute bans on cryptocurrency include Algeria, Bangladesh, China, Egypt, Iraq, Morocco, Nepal, Qatar, and Tunisia. Please note that regulations and enforcement can change over time, and it is always good to seek out the latest information on country-specific regulations.
Is It Legal to Buy Cryptocurrency in the USA?
Cryptocurrencies are legal in the USA. According to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), bitcoin is a convertible currency with an equivalent value to real currency or one that may be used as a substitute for real money. The Internal Revenue Service (IRS) has also categorized Bitcoin as property for taxation purposes.
In addition, any institution that administers or exchanges Bitcoin falls under the definition of a Money Service Business (MSB). Consequently, an MSB is subject to the Bank Secretary Act and must register with the U.S. Treasury and file reports on transactions exceeding $10,000.
Will Cryptocurrency Face a Problem?
As time has shown, chances are most cryptocurrencies will not survive in the event of a crash in the market. In addition, market prices can be easily manipulated, and investors may risk dealing with scammers and hackers.
What Are the Best Gold Coins for Investment?
Here are the best gold coins for investment:
- American Gold Eagle
- American Gold Buffalo
- Canadian Maple Leaf
- South African Krugerrand
- Austrian Gold Philharmonic
- Australian Kangaroo
- Gold Britannia
- Chinese Gold Panda
- British Gold Sovereign
- French Rooster Gold coin
The gold coins mentioned above are considered the best because eight are the purest gold coins in the world, with .9999 fineness.
Although the South African Krugerrand and French Rooster Gold coins have a fineness level below .9999, they are still considered an excellent choice for collectors. For instance, the Krugerrand is made of .9167 fine gold and an alloy of 8.33 copper. Similarly, the French Rooster coin is 90% gold.
Moreover, these coins come in different sizes and weights, including:
- One-twentieth ounce
- One-tenth ounce
- One-fourth ounce
- Half ounce
- One ounce
- Ten ounces
- One gram
Why Is It Better to Invest in a Gold IRA Instead of a Crypto IRA?
The primary reason why a gold IRA is better than a crypto IRA is that throughout history, gold has served as a hedge against inflation, market crashes, and geopolitical conflicts.
Moreover, gold has been around for thousands of years and is one of the safest investments because its price remains stable over time. In addition, gold tends to increase in value during times of high inflation or economic uncertainty.
A gold IRA offers diversification from other assets such as stocks and bonds that may be volatile during economic downturns, offering protection against inflation risk over time. For instance, statistics show that gold had around a 25% investment rate in 2020.
Lastly, gold is easy to liquidate whenever you need cash. However, other types of assets, such as crypto, may be difficult to trade because they have few opportunities to buy and sell, unlike gold.