by Emma Newbery | April 13, 2021
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Tempted by high interest rates? Watch out for the fees.
Cryptocurrency -- especially Bitcoin -- is an increasingly popular alternative investment. And if you're considering getting in the game, you're not alone.
Bitcoin IRA's latest product, IRA Earn, attracted over $100 million in its first 30 days. IRA Earn pays 6% APY on cash, 2.7% on Ethereum, and 2% on Bitcoin. That's a lot higher than the top high-yield savings accounts. There is, however, a minimum investment of $10,000.
This raises a lot of questions. Is 6% too good to be true? How does it pay such high interest rates? Can you put cryptocurrency in your IRA? And should you?
Several cryptocurrency companies offer high interest rates on your savings. And while it's logical to compare them with savings accounts, it's more accurate to see them as dividend-paying investments.
A savings account is a safe place to put money you might want to access in the short to medium term. You won't earn the same interest you'd get with, for example, a stock market investment. But -- unlike the stock market or cryptocurrency -- a savings account guarantees that interest rate. Plus, money you put into it is insured by the FDIC, which protects your funds up to $250,000 against bank failure.
Money you invest with IRA Earn doesn't have those protections.
Crypto lending boomed in 2020. With low savings rates worldwide, the high APRs of top crypto exchanges like Binance, BlockFi, and Crypto.com attracted customers.
The way interest-earning cryptocurrency accounts pay such high rates is by loaning your money out. Different companies do this in different ways. Genesis, which works with Bitcoin IRA, lends to institutions like hedge funds, trading firms, and exchanges.
One risk is that a lot of borrowers could default and leave no money in the pot to pay you back. That's somewhat mitigated by the fact that Genesis doesn't lend to retail borrowers. And Genesis says there haven't been any defaults since it launched three years ago. Both Genesis and Bitcoin IRA insure their assets. However, there's not a lot of information on Bitcoin IRA's site about how that insurance would work if one of the companies shut down.
There are benefits to putting some of your retirement savings into crypto. As it becomes more widely accepted, it becomes less risky -- especially if you stick to established coins and do your research.
And there's certainly potential to earn high returns -- in 2017, one Bitcoin was worth less than $1,000, but by the end of that year it was worth almost $15,000. However, these coins are highly volatile, and the crypto market is not regulated in the way the stock market is.
The only way you can put crypto into your IRA is to set up a self-directed IRA, which Bitcoin IRA does for you. It supports Roth and traditional IRAs, and you can transfer an existing 401(k).
The Bitcoin IRA fees are significantly higher than you'd pay for a straightforward IRA account with a stockbroker.
A 6% APY does go some way to offset those hefty fees. But if you open a conventional IRA with a low-fee broker, you might only pay an annual fee of $25-$50. A front-end fee might be between 3.75% to 5.75%. You're unlikely to face both a front-end fee and an annual fee.
That comparison is a little unfair because you can't put cryptocurrency into a conventional IRA. Self-directed IRAs are more expensive because you usually need a custodian. And, just as with Bitcoin IRA, you pay a setup fee, annual fee, and per-transaction fees.
If you put dollars into the IRA Earn program, you earn more interest and are protected from some of crypto's volatility. But you don't profit from potential cryptocurrency gains.
However, you might earn more than 6% in the long run with a conventional IRA account. And you'd pay much less in fees. Over the past decade, the S&P 500 has averaged returns of over 10%.
You could also get high returns from a crypto investment. And IRA Earn pays interest if you opt for Ethereum or Bitcoin. Bitcoin IRA supports other cryptocurrencies, too. Another big plus for keeping crypto in tax-advantaged vehicles like IRAs is that you don't have to keep track of your gains and losses for tax purposes.
Consider whether you want to put the money you'll need in retirement into a volatile asset. You may decide to diversify your retirement portfolio by putting some money into cryptocurrency. If so, investigate the fees involved -- depending on how much you want to invest, it may be more cost effective to use a crypto broker.
If you're thinking about a cryptocurrency IRA or an interest-earning crypto account, there's a lot of potential upside. But make sure you fully understand the costs and the risks before you dive in.
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