The popularity of cryptocurrencies has grown among the masses in recent years. Some people even think they are a good retirement investment. In fact, according to the 2022 Investopedia Financial Literacy Survey, around a third of investors under the age of 55 plan to rely on cryptocurrency during retirement.
This might seem like a risky plan, considering the volatility of the cryptocurrency market, and it is.
Luna di Terra blockchain, a once popular stable cryptocurrency, was wiped out in early 2022, bringing with it over $ 17 billion worth of cryptographic value. The coin’s price dropped from $ 116 to a fraction of a cent within days, making it one of the most dramatic crypto crashes ever recorded. This is, in part, because cryptocurrencies are not government-backed legal tender and therefore are not subject to the protection of the Federal Deposit Insurance Corporation (FDIC).
The US Department of Labor has warned the retirement industry to exercise “extreme care” when investing in cryptocurrencies, noting that the plan’s trustees have a legal obligation under the Employee Retirement Income Security Act to protect people’s retirement savings. . But some people are more comfortable with risk than others and established players, such as Fidelity Investmentsthey are taking note.
This year, Fidelity Investments, the largest pension plan provider in the United States, was the first to add Bitcoin as an investment option in its 401 (k) plans. Under their plan, investors will be able to allocate up to 20% of their retirement savings in bitcoin. But individual trustees can set their own employee contribution limits and maximum allocation limits.
But just because you can invest in an asset like cryptocurrency for retirement doesn’t necessarily make it a good idea.
- It is fashionable to invest in cryptocurrency, but putting bitcoin in a 401 (k) is a new idea.
- Fidelity Investments recently announced that it is offering bitcoin as an investment option in his 401 (k) plans by the middle of this year.
- A recent Investopedia survey revealed that a third of investors under the age of 55 will rely heavily on cryptocurrency during retirement.
Is cryptocurrency a good long-term investment?
The modern era of cryptocurrencies began with the launch of Bitcoin in 2009. Since then, Bitcoin has recorded an average annual return of 93.8%, which is pretty impressive in the long run, but that doesn’t mean there haven’t been any obstacles in the way. In 2018, the yield was -72.6%. And while early investors who held out made huge returns, not all coins did so well. With thousands of cryptocurrencies to choose from, investors have had mixed results, to say the least.
That said, cryptocurrency tops the list of best expected returns among people aged 18 to 55 in Investopedia’s 2022 Financial Literacy Survey. Among millennials, 30% predict returns from cryptocurrencies will outperform stocks, real estate, and mutual funds.
But time will tell if those expectations are grounded in reality. For now, it’s too early to know if cryptocurrency will be a good long-term investment. For most investors under the age of 55, their retirement is further away than any cryptocurrency is years. When you add to that the fact that those same investors who are expecting big returns don’t fully understand where they intend to invest their money, can be a little alarming.
In the Investopedia survey, across all age groups, over 40% of respondents said cryptocurrency is either too risky or too confusing. Among millennials, in particular, 44% say cryptocurrency is too confusing or risky for their money. Meanwhile, 58% of baby boomers say cryptocurrency is too confusing. Less than half of millennials said they can explain how cryptocurrencies work, while only 5% of baby boomers can explain cryptocurrencies, and only 3% understand NFTs well enough to share how they work with someone else.
So while it is clear that cryptocurrency may be a new and sometimes trendy new asset class, it is also extremely risky and volatile. You may think twice before relying on cryptocurrencies for your retirement planning and consult with a financial planner.
Cryptocurrency markets can follow similar patterns to equity markets, with up and down cycles. But a bear market, or a crypto winter, could have lasting impacts.
What to look for when choosing retirement investments
As you are building your retirement portfolio, it is vital to consider several essential factors, such as:
- Expected growth rate: An important investment fundamental is the expected growth rate. Equity and bond market investors rely on various valuation models to predict growth. It’s more complicated with cryptocurrencies.
- Risk and volatility: Both stock and bond markets have decades of historical data and risk measurement structures. Not only are cryptocurrencies riskier and more volatile than stocks or bonds, but measuring their risk is also more complex. The number of models available to measure cryptocurrency risk is limited.
- Cash flow: Many investments offer predictable dividends, bond coupon payments, and other forms of cash flow. Here, several cryptocurrencies provide an edge over more traditional investments thanks to yield staking and farming. It is possible, however, that these new systems will no longer work the same way ten to twenty years after a person retires.
Of course, just because something is new and untested doesn’t necessarily mean it’s a bad investment. The final decision on where to put the money is up to the investor, so he should weigh the pros and cons each time before making a decision.
How to build a basic retirement strategy
What is the appropriate investment amount for an investor? It depends on various factors. First, calculate your financial needs for retirement. Next, determine the allocation of the investments and contributions needed to get there.
Traditional investment strategies have focused on a combination of stocks and bonds to achieve this for the typical investor, often relying heavily on 401 (k) accounts and IRAs for tax advantage. In addition to cryptocurrency-specific and fully self-directed IRAs and Roth IRAs, some traditional brokerage firms are starting to add cryptocurrency to traditional retirement accounts. So, if you are convinced that this is your way to go, consult a financial advisor before investing your money in such a risky asset.
Of all investments in anyone’s life, retirement accounts are arguably the most important. And if you go big with cryptocurrencies, or invest only in cryptocurrencies for your retirement, and that asset class fails as we’ve seen in the past few cryptocurrency winters, you may be forced to reconsider your current or future plans at short notice.
Where Crypto fits into an investment plan
Due to the risk, volatility and difficulty of predicting the future of cryptocurrency, many investors should avoid including cryptocurrency in their retirement investments altogether. If you decide to include cryptocurrencies, it might be wise to keep them as a smaller part of your overall portfolio.
Unless you are a staunch cryptocurrency advocate and wish to leverage the tax savings of a cryptocurrency IRA, you may be better off keeping cryptocurrency as a relatively small part of your overall wallet and out of your retirement.
Many investment experts suggest keeping the majority of your retirement assets in the stock market, preferably in different exchange-traded funds (ETFs) and low fees. High-risk alternative investments are still fair game but reserved for a portion of your investments that are not critical to your livelihood in the future.
Is it possible to plan retirement with Bitcoin?
Cryptocurrencies are popular these days, but putting bitcoin in a 401 (k) is a new idea. Fidelity Investments recently announced which would begin offering bitcoin investment options in its 401 (k) plans by mid-2022.
The bottom line
When building your cryptocurrency investment strategy, consider this scenario. If you invested $ 5,000 in cryptocurrency and it increased 10x, you would have $ 50,000. It is a great return. But if it went to zero, would that be enough to ruin your retirement plans? Probably not.
While the $ 5,000 example works for some individuals or families, your investment portfolio, risk tolerance, and financial goals are unique. By understanding your investments and how each asset you own works, you can decide the ideal allocation for your retirement portfolio and other investments. Cryptocurrency can be part of one or both investment strategies. But if you plan on relying on retirement assets, invest carefully.