Cryptocurrencies have surged in popularity, with many considering them potential retirement investments. A 2022 Investopedia Financial Literacy Survey revealed that about a third of investors below age 55 intend to depend on cryptocurrency for retirement. The volatile nature of the crypto market raises concerns about the use of cryptocurrencies for retirement. In 2022, Terra blockchain’s Luna stablecoin was wiped out by a dramatic crash, erasing over $17 billion in value. Such incidents highlight the risks, especially since cryptocurrencies aren’t FDIC-protected.
The U.S. Department of Labor has warned the retirement industry about the risks associated with cryptocurrency investments. The warning highlights the fiduciary responsibilities of retirement plan managers under the Employee Retirement Income Security Act (ERISA). Some are willing to venture despite the risks, and major players like Fidelity Investments are responding. Fidelity, one of the largest U.S. retirement plan providers, now allows investors to allocate up to 20% of their 401(k) savings to Bitcoin.
Is Cryptocurrency a Suitable Long-Term Investment?
Bitcoin’s launch in 2009 marked the dawn of the cryptocurrency era. It has averaged an annual return of 93.8% since its inception. However, the journey hasn’t been smooth, with 2018 seeing a return of -72.6%. While early Bitcoin investors have reaped significant benefits, the same can’t be said for all cryptocurrencies.
The 2022 Investopedia survey showed that 30% of millennials believe crypto returns will outperform stocks, real estate, and mutual funds. Yet, the future of cryptocurrency as a long-term investment remains uncertain. Many find it too risky or confusing, with less than half of millennials able to explain how cryptocurrencies function.
Factors to Consider for Retirement Investments
When planning retirement investments, consider the following:
- Expected Growth Rate: Predicting growth is more challenging for cryptocurrencies than stocks or bonds.
- Risk and Volatility: Cryptocurrencies are inherently riskier and more volatile than traditional investments, and assessing their risk is complex.
- Cash Flow: Some cryptocurrencies offer advantages like staking and yield farming, but these systems might evolve or disappear by the time one retires.
Ultimately, the decision to invest rests with the individual after carefully considering the pros and cons.
Building a Core Retirement Strategy
Traditional investment strategies have leaned on a mix of stocks and bonds, often utilizing tax-advantaged 401(k) plans and IRAs. With the crypto wave, some brokerage firms are incorporating cryptocurrency into traditional retirement accounts. However, given the high stakes of retirement investments, it’s crucial to approach crypto with caution.
Where Does Crypto Fit in an Investment Plan?
Given its risk and unpredictability, many investors might be better off excluding or limiting crypto in their retirement portfolios. While some might see potential in a cryptocurrency IRA for tax benefits, keeping crypto as a minor part of the overall portfolio is advisable. Most experts recommend maintaining most retirement assets in diverse, low-fee exchange-traded funds (ETFs), with high-risk alternatives forming a smaller, non-critical portion.
Should You Consider Adding Crypto to Your Retirement?
Cryptocurrencies offer enticing returns, but they come with significant risks. For instance, a $5,000 investment in crypto could grow tenfold to $50,000, but it could also plummet to zero. While such a loss might be bearable for some, it’s essential to tailor investments to individual risk tolerance and financial goals. If considering crypto for retirement, proceed with caution and, ideally, seek expert advice.