At its most basic, the goal of investing money today is to get a larger return of capital one day in the future. The future may contain plans to make a large purchase, such as a car or a house, but it is generally for retirement. Investors must assess which assets to hold to maximize their chances of meeting their financial objectives.
Stocks and bonds comprise the opportunity set. However, a new asset class has just arisen as a potential investment opportunity. Let’s take a deeper look at whether you should use cryptocurrency in your retirement planning.
Is cryptocurrency a suitable investment for retirement?
Everyone’s answer is different. Investors have historically faced low-interest rates since the Great Recession, placing a high priority on yield. This has been a challenging scenario for fixed-income investors. However, for stock investors, the last decade’s easy-money policies have resulted in the S&P 500 earning an annualized total return of 13.2% over the previous ten years. This result far outperforms the larger index’s yearly average return of around 10%.
On the other hand, cryptocurrency promises even larger riches to those brave enough to follow the trend. The world’s two most valued digital assets, Bitcoin and Ethereum, have delivered five-year trailing returns of 942% and 604%, respectively. These figures comfortably outperform the S&P 500, garnering the interest of investors eager to invest in the fledgling asset class.
If you’re a young person with decades before retirement, It is wise to put a portion of your well-diversified portfolio into cryptocurrencies. Your investment depends on your risk tolerance, but most recommendations are no more than 5%. Increasing your allotment may be the best option as you grow more at ease and become educated about the Crypto marketplace. Because of the longer time horizon, a young individual can afford to take on more risks and be more proactive.
On the other hand, someone approaching or in retirement should take a considerably more cautious approach to investing. It would be wise to go so far as to advise against using cryptocurrencies at all. The logic is straightforward. Many people are aware that cryptocurrencies are quite volatile. Over the last eight months, the whole market for digital assets has lost about two-thirds of its value. Investing a substantial quantity of money that you may require in a short period is usually not a wise idea.
Then there’s the notion of staking your cryptocurrency or investing it in decentralized finance protocols to receive a dividend on your assets, similar to a fixed-income instrument. While the interest rates provided to investors here can be far higher than those found in the regular financial services business, the dangers are undeniably higher.
For starters, in the crypto realm, there are no investor safeguards guaranteed by the Federal Deposit Insurance Corporation or the Consumer Financial Protection Bureau. Furthermore, we are witnessing now how quickly things may deteriorate. Celsius, a troubled cryptocurrency lender, has filed for Chapter 11 bankruptcy and has blocked client accounts for over a month due to market circumstances.
Someone just starting their investing adventure has plenty of time to recover financially if their crypto assets suffer a substantial loss. A retiree, on the other hand, is not so lucky. As with any financial choice, risk tolerance, time perspective, and yearly cash expenditures must all be considered. Knowing this vital information will aid in determining the sorts of investments that will be made, ultimately leading to financial freedom.