Hi folks, so the following is another edition in a series of different things I’ve been digging into while digging through while trying to wait out this bear market. Before you get started I also want to put out an apology in advance if this article comes off as a FUD-promoter, because this sincerely wasn’t my intent. With Voyager’s recent announcement of Chapter 11 restructuring, I find it absolutely essential that we continue to ask questions about things that we put our money into, especially if we’re thinking about putting money into something potentially for the next 30+ years. I’m all about taking risks, but I also think it’s important that we ask ourselves some of these questions before we do. In addition, I also want to make it clear that I very much hope that crypto IRA’s succeed, because if they are able to work, they will have enormous benefit to the average joes like me that are eligible to even use them. There’s not many “leg-ups” that we can get compared to the 1%, and I consider IRAs (more specifically roth IRAs) to be one of those leg-ups.
Why a crypto IRA?
An IRA or an Individual Retirement Arrangement is basically a method in which people can make tax-deferred investments for retirement. In other words depending on which IRA you open up (because there are several), you can reduce your tax burden on potential gains by putting funds into IRA versus not. In terms of cryptocurrencies, this sounds exceptionally great for HODLers because if you were planning on holding on to your $BTC for 20-or-so years anyway, then why not put it into something like a roth IRA where you won’t have to pay capital gains taxes for when you retire and your crypto goes to the moon?
If you reported any gains from the bull-market last year you’ll personally know the pains of forking over significant portions of your crypto gains, so I completely understand why many people have been looking at putting their money into many of these relatively new and upcoming cryptocurrency IRA providers.
I think that there’s enough FUD in the market around cryptocurrency, so please believe me when I say that I don’t want to add any more, but given the current contagion that’s been hitting multiple platforms, I thought that it would be important to highlight some of the risks with these IRA providers as well.
Before venturing into different crypto IRAs, I’ve created a checklist of sorts to help me know what kind of crypto IRA platform I’m getting myself into…
The biggest first: Bankruptcy
In fiat-based IRAs, generally funds are covered by FDIC (Federal Deposit Insurance Corporation) for funds up to $250,000 dollars, or alternatively if your IRA is in stocks and bonds, most brokerage accounts are covered by SIPC (Securities Investor Protection Corporation) insurance which can cover up to $500,000 dollars if your brokerage goes bankrupt. In my research, I have yet to find a cryptocurrency IRA provider that has articulated an adequate contingency plan for what happens to your funds if they themselves as a company go down . In fact, with some bankruptcy scares around Coinbase last May, it was brought to light by CEO Brian Armstrong himself that in a doomsday scenario, customer assets could be subject to creditors:
What this means is that customer’s assets (what’s yours and mine held of Coinbase) will divvied up among everyone else’s, including all the shareholders and VC’s that got in way before you did. This normally equates to average retailers getting cents on the dollar as we’re usually the last ones in line get what’s leftover. Brian Armstrong’s tweet also reads as doubly-alarming because many of the biggest crypto IRA providers (i.e. iTrustCapital, Alto) have some if not all of their customer’s cryptocurrencies parked with Coinbase Custody. Considering how quickly (and sometimes dangerously) the market turns, if your crypto IRA provider becomes bankrupt or if the 3rd party your IRA provider hired goes bankrupt, it’s important to find out whether or not your cryptocurrencies are subject to bankruptcy proceedings.
With Crypto, you can Never say you’re Too Big to Fail
Last May, Terra lost more than an estimated $40 billion in value in less than a week. In June, Genesis and Celsius are reported nine digit losses because of defaults from 3AC, and today, Celsius 1.7 million users still can’t withdraw their funds. No matter how popular a platform/entity might be, it’s pretty safe to say that in the world of crypto, things can fail, and they can fail fast.
When dealing with IRAs, I would argue it’s doubly important to look at a company’s track record and longevity in deciding whether or not they’ll be around to hold your crypto until retirement. To put things in better perspective, $LUNA hit its all time high of $116 in April 2022 — that was just 3 months ago. Let alone 3 months, are you really willing to trust your funds to an uninsured entity for 30 years?
Transparency is Key, Especially when it’s “Not Your Keys”
In the TradFi world, it’s usually important to see if the holder of your funds has a fiduciary responsibility to its customers, or in other words, that there is some sort of trust that the company is engaged in mutually beneficial investment practices that show benefit to its shareholders. Hypothetically this should be just as important to whoever is managing your cryptocurrencies as well. But just as a quick exercise, go to any terms of service for any cryptocurrency IRA and just to a CTRL+F for the word “Fiduciary.”:
In alphabetical order:
After you read that section, ask yourself if you feel comfortable with them holding onto your retirement for 30 years. You need to hope that whoever is managing your funds isn’t engaged in some black box degen practices without you be fully aware and consenting to do so, or if they can move around your funds anywhere without you consenting to do so.
With many providers offering low fees (or even no fees), it actually makes me more skeptical of how the IRA company is profitable, or even more suspicious yet, if they’re offering you hundreds of dollars to open up a new account. Now if you’ve been following my blog, you should know that there’s obviously tons of ways to generate great yields relatively safely, just be sure that in the long-term that someone isn’t taking a 10x leverage on your retirement account… that is unless you’re OK with it. Because if your funds are potentially locked up for a 30-year period, I’m willing to bet that that 10x position is bound to get liquidated at some point.
Everyone will say they’re safe and secure, but what happens in the case of a hack?
If you followed the news earlier last month, IRA financial has filed a lawsuit against their cryptocurrency custodian Gemini after a hack had taken roughly $36 million dollars out of people’s retirement accounts in a matter of seconds. Want a sobering read? I’d invite you to take a read of the comments in the corresponding reddit thread where investors talk about losing their retirement and life savings.
Even though events are still unfolding, there are couple of key takeaways from the IRAF hack.
1. To my knowledge, victims still haven’t been made whole.
2. It will probably be at least months until someone takes legal responsibility (or even at least a settlement) for the loss of funds.
3. With no mention of the heist and transparency about what they’re doing to recover victim’s funds (or at least from what I couldn’t see after 10 minutes), IRA financial is continuing to operate, even still offering up to $200 cash back for signup bonuses:
4. I guess it’s great and all — the measures that these companies are taking in order to secure the safety of your funds — they should still have an contingency plan of how they would respond if they did get hacked, and this should be shared with users.
Honestly my heart goes out to the victims of the IRAF hack. Many of the comments run reminiscent of comments I read after Luna’s death spiral, however I feel perhaps even more sympathetic to the IRA victims because they weren’t trying to get any degen yields or leverage any bets — they just simply wanted a secure place to HODL their crypto long term.
I hate to say it, but a lot of this would be solved through Regulation
The truth is, that this would have never happened in an FDIC/SIPC-insured IRA. The government has backed FDIC to help consumers out in exactly these types of scenarios. If crypto-IRAs were offered the same assurances such as through FDIC or SIPC, a lot of these risks wouldn’t matter. With coverage from bank-runs and bankruptcy, you theoretically you could go all in with your $BTC and be able to sleep soundly at night knowing that your retirement account would still be in there in the morning.
Seeing the risks of crypto-IRAs, I also now fully understand why many crypto bros, like those of Bankless are practically begging for regulation (albeit done correctly), because it would promote trust in the value that crypto is supposed to represent.
Do I currently have funds in a crypto IRA? No. However, despite all these risks, I also still haven’t written off doing a crypto-IRA sometime in the future, and with so many different products out there, I am still hoping that I can find one whose risks that I feel comfortable with — perhaps that will be a post for later. In the mean time, I will continually be keeping an eye on any movements in government regulation and holding my $BTC until it moons.
Are there any other glaring risks that I missed? Or else if you’re involved with a crypto-IRA, are there any alleviating points that I missed that made you invest? If so, I would love to hear about it in the comments below and that would greatly help me aide in my own search.
As always, thanks again for reading and be sure to follow me on twitter where I share all my latest updates: https://twitter.com/CryptosWith
Disclaimer: None of this is financial advice and is for entertainment and educational purposes only. I am not a financial or tax advisor, and just a random guy on the internet so please be sure to do your own research to find what investment(s) might be best for you.