Earning Passive Income in a Self-Directed IRA Through Cryptocurrency Funds

Published on September 22, 2022

The interest in cryptocurrencies continues to grow and the crypto investment market is evolving. Although these digital assets have taken a beating in the markets in the last few months, investing in crypto—even in a bear market—remains a popular alternative asset for self-directed IRAs.

Cryptocurrency and self-directed IRAs

One reason why crypto is attractive to self-directed investors is that, as with most alternative assets, it performs better as a long-term investment. In our August webinar about financial fragility and cryptocurrency investing, Junaid Ghauri, chief investment officer of Pareto Technologies, said the data shows the cryptocurrency is a robust investment year-over-year and its average value has increased, thanks in part to mining the digital asset around the world for broader distribution.

He believes that more nontraditional assets, such as cryptocurrency, will prove to be more resilient against financial fragility over time. To paraphrase Junaid, “Any market must be strong enough to withstand the shocks of volatility. Crypto is a nascent asset when compared to traditional financial instruments, but it is accessible, fungible and less fragile than large institutions think it is. Massive market drawdowns happen cyclically, this is not unheard of in crypto and it is what we are seeing now.”

Self-directed IRAs and passive income through crypto funds

As we shared in a previous post, investors can invest directly in cryptocurrencies by purchasing the “coins” on an exchange/online platform. For investors who prefer a more hands-off approach, there is also the growing world of cryptocurrency funds that provide a passive income stream through cryptocurrency investments.

Crypto funds may invest exclusively in cryptocurrencies, or manage a mix of crypto and other assets. Crypto funds buy and trade the digital assets on behalf of the investor. In the case of a self-directed investor, the fund does so on behalf of the self-directed IRA.

Given the bear market that cryptocurrency has been facing since May 2022, earning passive crypto income is driving interest among investors to help offset losses during downturns and grow crypto capital proactively while reducing risk.

Investing in crypto funds

The list of crypto funds of various kinds is growing. According to Crypto Fund Research, there are more than 800 cryptocurrency/blockchain investment funds. In addition to a large number of venture capital funds and hybrid funds (which invest in liquid cryptocurrencies as well as initial coin offerings), there are:

• ETFs. Exchange-traded funds (ETFs) can hold cryptocurrency futures contracts or miner stocks. Much like commodities futures, investing in crypto futures contracts creates opportunities based on future anticipated price of digital assets such as Bitcoin.
  • Investors buy shares in the fund.
  • ETF share prices fluctuate throughout the trading day so the price the investor pays depends on the time of day a trade is placed.
• Hedge funds. Other crypto funds have strategies more like hedge funds. A PwC survey found that the number of hedge funds focused on crypto globally has potentially grown to more than 300. Additionally, 38% of traditional hedge funds are investing in crypto assets this year, up from 21% in 2021.
• Cryptocurrency mutual funds. These comprise a collection of crypto assets packaged into one investment.
  • Investors buy and sell specific dollar amounts rather than shares.
  • These funds are priced once per trading day, so all trades made at any time that day have the same price.
• Cryptocurrency coin trusts. These entities, which trade over the counter, trade shares in trusts holding large pools of a cryptocurrency.
• Crypto savings accounts. These are interest-bearing accounts, like a regular savings account, focused on cryptocurrency. The self-directed IRA deposits funds into a CEX (crypto exchange) platform that are used to lend, stake, or invest. The profits are paid to the retirement plan as interest.

Active guidance from Next Generation

At Next Generation, there’s nothing passive about our approach as an account administrator and custodian. Whether our clients prefer direct investments into cryptocurrency or crypto funds for passive investing, every transaction undergoes a review process to ensure all mandatory paperwork is completed correctly, the transaction would not be considered prohibited, and is executed correctly—either with an exchange platform or fund manager.

Next Generation knows that self-directed investors are informed investors. If you’re thinking of including crypto funds in your self-directed IRA portfolio as a path to passive income generation, we recommend you thoroughly research and fully understand the fund before making the investment.

Need more information? Contact us today.

Please note that we do not provide financial, or investment advice and we encourage you to consult with a trusted advisor if this is a strategy you’d like to explore.