Wondering if you really own your Bitcoin purchase? You may have good reason to worry.
- Purchasing Cryptocurrency is gaining in popularity
- Centralized and decentralized crypto exchanges exist
- Investing via Self-Directed IRA offers incredible potential
Many Americans have come to recognize that the stock and equities markets are simply too volatile to hold all of a person’s assets without risk. To combat the volatility, many are turning to alternative assets in their retirement accounts, especially in a Self-Directed IRA. One of many alternative assets that can be purchased and held in a Self-Directed IRA is cryptocurrency.
If you don’t know exactly what cryptocurrency, particularly Bitcoin, is, here’s a brief summary. Although a part of its name, Bitcoin is not a physical coin. It’s a type of digital currency, usually referred to as cryptocurrency. It is created by “miners” who use computers to break cryptographic codes to unlock the coin. It’s not backed or regulated by any government. Instead, a blockchain is used as a ledger to keep track of all transactions. Users can verify the authenticity of every use of a “coin.”
Did you know you can invest in both gold and Bitcoin with your retirement funds? By self-directing you IRA or 401(k) plan, you can invest in just about anything you like. The only caveat is that it must be IRS-approved. Most precious metals and cryptocurrencies are allowable investments, as the IRS considers these items property.
If you are self-employed, a Solo 401(k) is your best option for alternative investing. Everyone else can utilize a Self-Directed IRA. Both types of plans work just like their regular counterparts. However, you are no longer limited in the types of investments traditional financial institutions offer, such as stocks, bonds and mutual funds.
The best part about investing in gold or Bitcoin with retirement funds, is that all gains are tax-free. Traditional accounts offer tax-deferral, while Roth options allow for tax-free distributions. This means your retirement account funds can support you and your investments can work for you as you build your whole retirement picture.
There are different kinds of cryptocurrency exchanges, including centralized and decentralized. Coinbase, Bitstamp, Kraken, etc. are considered centralized crypto exchanges because, essentially, all information and trading data goes through a single point. Centralized crypto exchanges are believed to offer an efficient trading environment at the cost of user’s privacy and personal information.
In contrast, a decentralized crypto exchange is a type of exchange that isn’t operated by a central party or have a single point. In other words, unlike a centralized crypto exchange, a decentralized exchange, such as Uniswap, would not need all the information to go through a single point. In essence, a decentralized crypto exchange is kind of like a peer-to-peer network where there are many points of contact.
When purchasing cryptocurrency from, for example, PayPal, the ownership of the crypto is not in question either, it’s just that it doesn’t belong to you. When you purchase Bitcoin, you are given a public and a private key – and if you hold both, your ownership is secure. But when you purchase through PayPal, they continue to hold the private key. This means that you are not able to control it as you like, even though this is meant to be an asset you are holding and control.