An Individual Retirement Account (IRA) is a self-directed retirement fund that offers tax advantages. Funds in these accounts can be invested in various assets, such as stocks, bonds, and cryptocurrency. Crypto investments serve as a diversifier, and they have the potential to boost growth quickly. Here are some ways a crypto IRA may fit into your overall financial plan:
Understanding Diversification
A diversified portfolio spreads your investments across multiple industries and asset classes. This helps reduce risk because if one investment performs poorly, it’s offset by an asset that performs well. Long-term, this may lead to a more consistent return. Industry diversification protects against sector downturns, but investing in multiple asset classes helps portfolios adapt to macroeconomic shifts. Asset classes respond differently to economic changes, such as changing interest rates, providing additional ways to guard against financial risk. Some asset classes include:
- Bonds: When you buy a bond, you are lending money to an organization. You then receive set interest payments each year until the bond’s maturity date, when your initial investment is paid back. Interest rates are typically based on inflation and the risk that the loan won’t be repaid.
- Stocks: A company can sell shares of ownership to the public in exchange for cash. This allows investors to profit from a company’s success, but share prices often fluctuate in response to its performance.
- Commodities: Commodities are goods that are bought and sold, typically for manufacturing; these include agricultural products, energy resources, and metals. Because they are key to an area’s economy, they may serve as a hedge against inflation. Investment returns are often determined by supply and demand.
- Cryptocurrency: Crypto is a highly volatile asset that operates on decentralized blockchain technology, so its value doesn’t usually change in response to traditional markets. Because they do not produce cash flows, investors may use them as stores of value, like gold.
Determining Allocation
Integrating crypto into your investment portfolio requires a strategic approach to risk management due to the currency’s high volatility. Since crypto can fluctuate significantly in value within a day, deciding how much to invest is key. Experts recommend investing no more than 5% of your portfolio; this offers potential gain while minimizing the risk of loss.
How you invest in cryptocurrency also impacts the asset’s performance. Some currencies can be purchased directly, allowing direct ownership but requiring self-managed security. Exchange-traded funds enable you to purchase crypto through a brokerage account, which eliminates the need to manage security. With a crypto IRA, your assets are held by a custodian, who manages tax reporting. Your crypto is also stored offline in cold storage; this protects your investment from potential hacking threats.
When investing in crypto, it’s beneficial to monitor asset distribution periodically. During periods of growth, cryptocurrency might quickly become a larger percentage of your portfolio than originally intended. Regular rebalancing—selling digital currency and reinvesting funds elsewhere—helps maintain your preferred allocation percentage. Selling when prices surge lets you lock in profits, and it prevents future losses when the market shifts.
Choosing a Cryptocurrency
Not all cryptocurrencies function in the same manner; they can differ in their purpose, transaction speed, and supply limits. These factors affect the ease of investment and the likelihood of returns. Some, like Bitcoin, function as a store of value. Because the number of coins is capped, the value is unlikely to be debased. This enables it to function similarly to gold or precious metals. Other cryptos, such as USDC, are “stablecoins.” These are tied to government-issued legal tender, helping minimize volatility. Some crypto IRA accounts allow you to invest in multiple cryptocurrencies, supporting diversification even within a single asset.
Start a Crypto IRA
A cryptocurrency IRA enables you to diversify your retirement accounts while receiving tax advantages. Traditional crypto IRAs are funded with pre-tax income, and account holdings can grow through investment gains tax-free until withdrawal. Funds in a Roth cryptocurrency IRA have already been taxed, and only gains are taxed at withdrawal. Start investing in cryptocurrency today.
