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The Hail Mary Retirement Plan: Bitcoin IRA

By Jeff Kauflin

In the spring of 2017, Kenneth M., a physician in his mid-50s, was looking for the right medicine to rejuvenate his retirement savings. Drawn to technology, he found himself watching YouTube videos of entrepreneurs discussing cryptocurrencies and their real-world applications. The underlying concept of a blockchain—a technical infrastructure over which information can move quickly, cheaply and securely—made his eyes widen. He was familiar with the barriers that prevent electronic health records from moving smoothly between health care providers, and he became excited by the problems blockchain might solve.

The doctor liked the idea of investing in virtual currencies in a retirement account, because using an IRA meant he wouldn't have to worry about the tax implications of buying or selling within the account. Through a Google search, he discovered Bitcoin IRA, a three-year-old company that partners with an IRA custodian and a cryptocurrency wallet—like a bank account for virtual currencies—to let people invest.

So he dived in with a risky bet, sinking 15% of his retirement savings, or $350,000, into Bitcoin and other crypto-assets like Ether and Litecoin. As he watched prices climb, he caught crypto fever, pouring in another $250,000 over the summer and deviating from his otherwise disciplined investment style. From May to December 2017, Bitcoin surged from $1,747 a coin to $13,545. Ether's value rose by nine times. Today the physician's Bitcoin IRA portfolio is worth $2.5 million, making up more than 50% of his retirement savings. “It will require me to do some rebalancing,” he says.

But he's not ready to take his foot off the gas yet, and he's not alone. Among the dozen or so Bitcoin IRA investors Forbes spoke with, only four have taken money off the table to secure gains. “There's a component of greed, a component of fear of loss,” says Chris Kline, Bitcoin IRA's COO, who suggests customers put from 5% to 20% of their retirement assets in virtual currencies.

Bitcoin IRA, based in Sherman Oaks, California, isn't a financial advisor, and it's not regulated by the SEC like Vanguard or by the Federal Reserve like Wells Fargo. It's a largely unregulated “financial conduit” that makes use of self-directed IRAs, which have been around since the government created IRAs in 1974. Self-directed IRAs let people hold nontraditional assets like real estate, gold and virtual currencies in a retirement account. Since cryptocurrencies are transferred and stored in unique ways, Bitcoin IRA has carved out a niche to help investors address security challenges. If you hold Bitcoin, you need a private key—like a password, just a string of numbers and letters—to move your money. So extra security is critical, and that's Bitcoin IRA's primary value proposition.

The company partners with Bitgo, a Silicon Valley cryptocurrency-security startup that serves as a wallet and creates three unique private keys associated with an investor's Bitcoin IRA account. Bitgo stores one key itself, gives another to the IRA custodian, Kingdom Trust, and a third to keytern.al, a startup that provides recovery services if your key is lost or damaged. All of these keys are stored off the internet, in “cold storage” locations. For the time being, residents of New York State can't use Bitcoin IRA because Kingdom Trust doesn't have a BitLicense, a state requirement for companies that hold cryptocurrencies.

Any investor can create a self-directed IRA without using Bitcoin IRA, and there are attorneys and specialty firms like San Francisco's Pensco Trust that will help you invest in a host of alternatives. Investing in a cryptocurrency IRA yourself may require you to set up an LLC to buy the tokens, and you will need to select an exchange, a secure wallet and an IRA custodian. For its one-stop access to pure-play cryptocurrency IRAs, Bitcoin IRA charges steep upfront fees of 10% to 15%. On top of that, Kingdom Trust charges about 1% a year on assets.

The wheeler-dealers behind Bitcoin IRA are Chris Kline, Johannes Haze and Camilo Concha, who also run Fortress Gold Group, which helps people invest directly in gold through their IRAs. First-mover advantage and aggressive Google advertising campaigns have allowed them to build the largest presence in the crypto-asset IRA space, with close to 4,000 customers and $105 million in inflows since they began accepting funds in June 2016. Those assets have ballooned to about $287 million due to cryptocurrencies' soaring prices. According to the company, their average Bitcoin IRA investor earned a 172% return in 2017.

No surprise that competition is coming. Two newcomers, Noble Bitcoin and CoinIRA, offer similar services, with fees ranging from 10% to an outrageous 25%, depending on which token you invest in. Fidelity, Vanguard and Charles Schwab don't offer self-directed IRAs or cryptocurrency IRA products. But investors in traditional IRAs can choose to allocate money to funds like Kinetics Internet Fund, which has 28% in Bitcoin, or American Beacon Ark Transformational Innovation Fund, with 8% in Bitcoin.

As in any hysterical gold rush, there are tales of lottery winners. At 60 years old, Randy Krafft of Terlton, Oklahoma, retired from his job as a hospital supply-room manager to take care of his wife, who had cancer. He saw his retirement savings decrease from $245,000 to $132,000 over eight months, before she passed away. A year later he threw a proverbial Hail Mary and dumped all his retirement funds (which amounted to $118,000 after fees) into Bitcoin IRA. Today his retirement account stands at more than $500,000, and he has plans to travel and make home improvements.

In July 2017, Simpath Srinath of Atlantis, Florida, took a five-week hiatus from his job as an IT manager for his wife's medical practice to research cryptocurrencies. After the 62-year-old pulled his head up, he thought, “This is something that will absolutely change the future of finance.” He has since doubled his IRA to more than $2 million, and now he's telling all his friends, “Go ahead and invest—at least 5%.” Steven Phung, a risk-loving real estate developer from Pasadena, California, who lost 80% of his wealth in the financial crisis, has turned $500,000 into $1.4 million through Bitcoin IRA.

Of course, with Bitcoin prices whipsawing daily, including its recent swoon from nearly $20,000 in December to $10,000 a month later, these crypto-retirees are rolling the dice.

Perhaps the only model for responsible Bitcoin IRA investing is the case of Kelly Nguyen, a 45-year-old entrepreneur in Los Angeles who sold her specialty pharmacy business, which had revenues of about $160 million, in 2012. Nguyen was already retirement rich, so she committed only 10% of her retirement savings to Bitcoin IRA. After quadrupling her holdings, she cashed out 75% of her initial investment. Now she's gambling with mostly winnings. “I hardly look at my account,” Nguyen says, noting crypto's hypervolatility. “It can be painful.”

To read this story on the Forbes website, click here.