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By Alina Dizik
Updated: July 23, 2021 10:36 AM ET | Originally published: March 1, 2021
Portrait of Joshua Seymor on colored background with hundred dollar bills and bitcoins
Money; Getty Images; Portrait: Joshua Seymour

When Bitcoin started its most recent rally this winter, Joshua Seymour, a construction worker in Elora, Tenn., decided it was time to jump in. A few months later, he worked to convert his Roth IRA into a self-directed IRA so he could invest in Bitcoin.

The cryptocurrency — not mutual funds — now makes up his entire portfolio in hopes that its price, currently just under $50,000, will continue to rise for decades before the 30-year-old retires. “I’m glad I did it,” says Seymour who is also completing a degree in information systems. “It’s the best long-term asset to hold.”

It’s long been an article of faith that retirement portfolios should contain a judicious mix of stocks and bonds. But with Bitcoin’s value — not to mention the ranks of the Bitcoin faithful — surging to new heights, more and more retirement investors have been considering the idea of owning the cryptocurrency alongside traditional securities. In some cases, they are betting it all.

To meet this new demand, a Bitcoin IRA cottage industry has sprung up, helping investors set up retirement accounts that can accommodate the cryptocurrency. However, many financial advisers, who advocate a slow-and-steady savings approach, view the practice with alarm. To them, today’s Bitcoin frenzy resembles the leave-your-senses-behind speculative mania of the dot-com bubble, which left some investors rich but many more disappointed and broke.

“It’s not any different than getting a dozen lotto tickets,” says Charles Sachs, chief investment officer at Kaufman Rossin Wealth, an advisory firm based in Miami.

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The Lure of Bitcoin

With Reddit abuzz and new investing sites devoted just to crypto news, fascination with Bitcoin has reached a new generation of investors, many of whom are skeptical of traditional stock-and-bond portfolios.

Michael Watkins, a real estate title company owner in Atlanta, says his Bitcoin IRA is a way to hedge against potential inflation in the next decade. Leaving it in his retirement account makes it easy to take a long-term approach to his investment, he adds. “The more I learn, the more I’m convinced it’s a safe place to put my money,” says the 49-year-old.

In Bothell, Wash., software engineer David Whitlock converted his 401(k) at Fidelity into a self-directed IRA earlier this year. His goal is to get out of owning mutual funds completely and use the money to invest in Bitcoin. With Bitcoin prices fluctuating so dramatically (they have fallen about 15% in the past two weeks), he wants to keep it in a retirement savings account rather than being tempted to buy and sell. “I don’t want to try to time it in and out,” says the 42-year-old. “I’m mostly sticking it in there to never touch it again.”

Bitcoin and IRAs

Many Bitcoin buyers compare the cryptocurrency to gold, arguing it’s an additional way to hedge against rising prices or a weak dollar. Putting the Bitcoin in an IRA not only keeps the focus on the long-term, it helps avoid the threat of owing capital gains taxes on potential profits.

“Folks are concerned about stocks and using this for diversification,” says Chris Kline, co-founder of Bitcoin IRA, a one-stop shop for people looking to create Bitcoin IRAs based in Sherman Oaks, Calif. The company launched in 2016 to make it easier to purchase cryptocurrency in retirement accounts.

At Swan Bitcoin, a Bitcoin brokerage based in Calabasas, Calif., that advertises their retirement offerings, less than 5% of its customers have an IRA that includes Bitcoin. But that number has grown steadily in the last months, says chief executive Cory Klippsten. “Many people want to do it and are trying to figure out what percentage of their retirement portfolio they want in Bitcoin,” says Klippsten.

Companies including Kingdom Trust, BitcoinIRA and Broad Financial specialize in helping users set up what’s called a self-directed IRA LLC. Once those LLCs are set up, users can purchase Bitcoin or other alternative assets and add them to the retirement account.

The IRS taxes virtual currencies like stocks and bonds, applying the same principles to transactions. That means if you held onto the currency for longer than a year, you’ll need to pay long-term capital gains (15% for most middle-income people).

Keeping it an IRA lets you avoid this, but you can’t touch the money without penalty until you’re 59 ½. In a traditional IRA, you’ll need to pay taxes upon withdrawal. With a Roth IRA, your initial contribution is taxed but your earnings can grow without paying additional taxes.

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Bitcoin’s Risks

While Bitcoin’s acolytes tend to focus on the future of blockchain technology, it’s worth paying close attention to currency’s past. As recently as the start of 2017 Bitcoin was trading under $1,000. By the end of that year it had jumped to nearly $20,000. By late 2018, however, it was back down to nearly $3,000.

One big reason for Bitcoin’s volatility is its novelty. While it’s technology it may be exciting, it was created only in 2008. Since then it’s spawned plenty of copycats, and no one knows for sure whether it will be around in 30 years, when many mid-career workers will retire.

There are other issues too: Unlike most other investments, Bitcoin doesn’t pay out cash to its owners like a stock pays dividends or a bond interest. That means its value only increases when more people want to own it.

And, at least for now, Bitcoin’s use as a currency is limited because its extreme volatility makes it difficult to use or spend like other, more-established currencies, says Michael Hanson, senior vice president of research at Fisher Investments in Camas, Wash. Investors “should be careful to understand how this technology manifests itself in 10 years,” he says. “Only then can you truly ascertain how much to set aside for a moonshot.”

How to invest in Bitcoin

While Bitcoin is risky, it has been gaining broader acceptance as a mainstream financial asset. And some financial advisers say it can have a place in your portfolio, albeit a much smaller one than Bitcoin’s biggest fans envision.

Sachs says he doesn’t discourage investors from using a small percentage — typically less than 5% of their net worth — for something risky with the potential for high returns, which can include Bitcoin. Often it can satisfy an investor’s need to gamble on something without impacting their overall wealth, he says. “In this case, it’s more about the thrill of investing it,” he says. “Psychologically it can be very healthy.”

Shaun Melby, a financial advisor in Nashville, advises his clients to max out existing retirement accounts first before experimenting with purchasing Bitcoin.

“I try to make sure that they have the viewpoint that this is money that could go away tomorrow,” he says. Knowing this money is not being taken from existing accounts can soften the blow of potential losses, he adds.

More from Money:

The New Investor’s Survival Guide: How to Make Money (and Stay Sane!) in Today’s Wild Markets

Retirement Income: Where to Find the Best Yields for March 2021

How to Invest in Bitcoin Alongside Stocks and Bonds

(An earlier version of this story misspelled the town names Camas, Wash., and Bothell, Wash.)