The popularity of cryptocurrencies has increased among the masses in the past few years. Some people even think they’re a good investment for retirement. In fact, according to the 2022 Investopedia Financial Literacy Survey, about a third of investors under the age of 55 plan to rely on cryptocurrencies in retirement.
Given the volatility of the crypto market, this might sound like a risky plan, and it is.
The Terra blockchain’s Luna, a once-popular stablecoin cryptocurrency, was wiped out in early 2022. take away more than $17 billion in crypto value. The coin’s price fell from $116 to a fraction of a penny in a matter of days, making it one of the most dramatic crypto crashes of all time. That’s partly because crypto isn’t legal tender backed by the government, and thus isn’t subject to Federal Deposit Insurance Corporation (FDIC) protection.
The U.S. Department of Labor has warned the retirement industry to exercise “extreme diligence” when investing in crypto, noting that plan trustees have a legal duty to protect people’s retirement savings under the Employee Retirement Income Security Act. But some people are happier with risk than others and the established players like Fidelity Investmentsbecome attentive.
This year, Fidelity Investments, the largest provider of retirement plans in the United States, became the first to add Bitcoin as an investment option to its 401(k) plans. Under their plan, investors can invest up to 20% of their retirement savings in Bitcoin. However, individual trustees may set their own employee contribution limits and allocation caps.
But just because it’s possible to invest in an asset like crypto for retirement doesn’t necessarily make it a good idea.
The central theses
- Investing in cryptocurrency is trending, but putting bitcoin in a 401(k) is a novel idea.
- Fidelity Investments recently announced that it would offer Bitcoin as an investment option it is 401(k) plans by mid-year.
- A recent survey conducted by Investopedia found that a third of investors under the age of 55 will be heavily reliant on cryptocurrencies in retirement.
Is cryptocurrency a good long-term investment?
The modern age of cryptocurrencies began with the introduction of Bitcoin in 2009. Since then, Bitcoin has averaged a 93.8% annualized return, which is pretty impressive over the long term, but that doesn’t mean there haven’t been bumps along the way. In 2018, the return was -72.6%. And while early investors who stuck with it reaped massive returns, not all coins have fared so well. With thousands of cryptocurrencies to choose from, investors have had mixed results, to say the least.
However, crypto topped the list of best expected returns among 18-55 year olds in the 2022 Investopedia Financial Literacy Survey. Among millennials, 30% expect crypto returns to outperform stocks, real estate, and mutual funds.
But time will tell if these expectations are justified in reality. At the moment it is too early to know if cryptocurrency will be a good long-term investment. For most investors under the age of 55, their retirement is more years away than any cryptocurrency is years old. Add to that the fact that the same investors who expect great returns don’t understand exactly where they want to put their money, and it can be a little alarming.
In Investopedia’s survey, more than 40% of respondents across all age groups said cryptocurrency was 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 cryptocurrencies are too confusing. Less than half of millennials said they could 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.
While it is clear that cryptocurrency can be a novel and sometimes trendy new asset class, it is also extremely risky and volatile. You might want to think twice before leaning on crypto for your retirement and consult a financial planner.
Cryptocurrency markets can follow similar patterns to stock markets, with cycles up and down. But a bearish market or crypto winter could have lasting effects.
What to look for when choosing retirement investments
When building your retirement portfolio, it’s important to consider several key factors, such as:
- Expected growth rate: An important investment basis is the expected growth rate. Stock market and bond investors rely on various valuation models to predict growth. This is more difficult with cryptocurrencies.
- Risk and Volatility: Both the stock and bond markets have decades of historical data and frameworks for measuring risk. Not only are cryptocurrencies riskier and more volatile than stocks or bonds, measuring their risk is more complex. The number of cryptocurrency risk measurement models available is limited.
- cash flow: Many investments offer predictable dividends, bond coupon payments, and other forms of cash flow. This is where several cryptocurrencies offer an advantage over more traditional investments thanks to staking and yield farming. However, it’s possible that in ten to twenty years, when someone retires, these newer systems won’t work that way.
Of course, just because something is new and untested doesn’t necessarily mean it’s a bad investment. The ultimate decision of where to put the money rests with the investor, so they should always weigh the pros and cons before making a decision.
How to create a core retirement strategy
What is the appropriate investment amount for an investor? It depends on various factors. First, calculate your financial needs for retirement. Then determine the allocation of investments and contributions required to get there.
Traditional investment strategies have focused on a combination of stocks and bonds to achieve this goal for the typical investor, often relying heavily on tax-advantaged 401(k) and IRA accounts. In addition to crypto-specific and fully self-directed IRAs and Roth IRAs, some traditional brokerage firms are beginning to add cryptocurrency to traditional retirement accounts. So if you are determined that this is your way forward, consult a financial advisor before committing your money to such a risky investment.
Of all the investments in a person’s life, retirement accounts are arguably the most important. And if you’re big on crypto — or just investing in cryptocurrency for your retirement and that asset class goes bust, as we’ve seen in recent crypto winters — you could be forced to reconsider your current or future plans without 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 crypto in their retirement plans. If you decide to include cryptocurrencies, it may make sense to keep them as a smaller part of your overall portfolio.
If you’re not a big believer in cryptocurrency and want to take advantage of the tax savings of a cryptocurrency IRA, you might be better off keeping cryptocurrency as a relatively small portion of your overall portfolio and outside of your retirement.
Many investment experts suggest keeping the majority of your retirement savings in the stock market, preferably in low-fee, diversified exchange-traded funds (ETFs). High-risk alternative investments are still fair game, but reserved for a non-vital part of your future investments.
Can you use Bitcoin to plan for retirement?
Cryptocurrencies are popular these days, but putting bitcoins in a 401(k) is a new idea. This was recently announced by Fidelity Investments that it would start offering Bitcoin investment options in its 401(k) plans by mid-2022.
The final result
When building your cryptocurrency investment strategy, keep this scenario in mind. If you invested $5,000 in cryptocurrency and it went up 10x, you would have $50,000. That’s a great return. But if it went to zero, would it be enough to ruin your retirement plans? Probably not.
While the $5,000 example works for some individuals or households, your investment portfolio, risk tolerance, and financial goals are unique. By understanding your investments and how each asset you own works, you can determine the ideal allocation for your retirement portfolio and other investments. Cryptocurrency can fit into either or both of these investment strategies. But if you plan to rely on assets for retirement, invest wisely.
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