Bitcoin is a digital currency that functions in the same way as standard currency. You can buy goods and services with it, and accept it as payment in kind. It is stored in a digital wallet which comes in the form of a program or mobile app.
If you want to learn more about the technical aspects of Bitcoin, here’s a helpful guide from the main Bitcoin website.
There are two ways a retirement account can invest in Bitcoin: by purchasing Bitcoin directly through an exchange or by investing in a fund (e.g. SecondMarket) which holds Bitcoin. The fund has a superficial advantage in the fact that it makes Bitcoin “palatable” to the brokerages. In fact, for a short time Fidelity was allowing Bitcoin investment with this method. (Fidelity stopped for reasons that have not yet been explained.) The disadvantage of this approach is one that all intermediary based investments share: profitability. Every time you add a middleman to the process, either in the form of a broker or a fund, it means a further drain on your retirement funds. Every finger in the pie means more fees and surcharges. The second approach is to buy Bitcoin directly through the exchanges. A retirement investor can do this with a self-directed platform that allows for checkbook control. In this model, the IRA is set up with an LLC which can then purchase the Bitcoin directly. There are no middle men, and hence no additional fees.
That is the big question, although one which nobody can really answer. (If I could predict the future, chances are I wouldn’t be writing this blog.) Bitcoin is an asset like any other retirement investment. If you’re comfortable with the idea of investing in foreign currencies or precious metals, then presumably Bitcoin falls within your comfort range. It has been somewhat volatile in the past few months, but many experts say that this is normal with a new currency. There is a relatively short period of up-and-down which will eventually stabilize at a sensible rate. The best thing to do is to research Bitcoin as an asset, and then make an informed choice if it’s right for your retirement fund.
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