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Cryptocurrency is one of the latest investing trends, and it may have some people wondering if it's a good idea to incorporate some digital assets into their retirement plans. If you're thinking about investing in crypto for your retirement, it's important to understand the risks associated with these assets and how their volatile nature can impact your portfolio.
What Is Cryptocurrency?
Cryptocurrencies are digital assets that can be used in financial transactions or as a speculative investment. Popular digital assets like Bitcoin, Ethereum and Dogecoin have enjoyed increasing popularity in recent years as investors have looked for opportunities to get massive gains in a short period of time.
Cryptocurrencies run on blockchain technology, which utilizes a public ledger to record and store information in a way that's difficult to hack or tamper with. Cryptocurrencies aim to provide users with more privacy and security in their everyday transactions than traditional payment methods.
Does Crypto Belong in Your Retirement Fund?
Traditional retirement accounts typically don't allow you to invest in crypto assets. There are special self-directed individual retirement accounts (IRAs) that you can use to invest in Bitcoin and other crypto assets, but these accounts can be expensive, and regulations are cumbersome. So if you're thinking about it, you'll likely need to invest in crypto outside of your traditional retirement fund. But it's important to understand the risks of doing so.
Due to their extreme volatility, it's possible to earn a good amount of money in the short term by making well-timed investments in cryptocurrencies. In the medium and long term, however, it's anyone's guess. Cryptocurrencies are still relatively new, and it's still unclear how they'll function in the long term as regulators around the world determine how to handle them and the markets continue to fluctuate.
That's not to say cryptocurrencies likely won't be around 10 or 20 years from now. Financial institutions have already begun to incorporate blockchain technology—the technology that powers crypto assets—and even individual digital currencies into their business models.
Still, digital assets carry much higher risks than other financial instruments like stocks, bonds and mutual funds. If your brokerage firm fails, your traditional investments are protected by Securities Investor Protection Corporation (SIPC) insurance. But if you have an account with a crypto exchange, such as a crypto savings account or trading account, there's no recourse if the platform or the currency fails. Even when held in a traditional brokerage account or self-directed IRA, cryptocurrency is not covered by SIPC insurance.
Despite the risk, the allure of potential financial gain from cryptocurrency investments is too much for some to deny. If you're considering investing some of your long-term money in cryptocurrencies, financial experts suggest that it should represent only a small percentage of your total portfolio. Make sure you fully understand all the risks associated with crypto investments before you make the decision to add them to your retirement plan.
More Reliable Retirement Savings Options
Whether you're a few years from retirement or you have decades of work ahead of you, there are plenty of financial instruments you can choose to invest in that can provide a more reliable return than cryptocurrency.
As you mull over changes to your investment portfolio, it's important that you diversify it in such a way that you don't have too much money in one asset. For example, buying individual stocks is a typical investment strategy, but going all in on one company can cause your retirement balance to be wiped out if that company's stock plummets.
Also, depending on how long you have until you retire, you may want to prioritize certain investments over others. People in their 20s and 30s can afford to invest in riskier assets because they won't be as impacted by short-term market volatility. But if you're retiring in the next five to 10 years, you may want to prioritize safer investments that are less likely to drop in value and put your retirement at risk.
Here are some alternatives to cryptocurrency that you can include in your retirement portfolio:
- Stocks: While you can invest in individual stocks in an IRA, you likely won't have this option in a 401(k) or similar employer-sponsored retirement account. If you're planning to invest in stocks, make sure to diversify your holdings across different sectors—technology, consumer goods, energy, utilities and the like.
- Bonds: Bonds tend to provide a lower return than stocks, but they're comparatively less risky. If you're younger or have a higher risk tolerance, it may make sense for your portfolio to lean more heavily into stocks, but experts generally recommend increasing your bond allocation as you get closer to retirement.
- Exchange-traded funds (ETFs): ETFs are investment funds that are traded on stock exchanges like the New York Stock Exchange or the NASDAQ. These funds typically pool money from investors and diversify their investments based on the fund type. There are stock ETFs, bond ETFs, currency ETFs, commodity ETFs and even ETFs that provide a mix of different financial instruments.
- Mutual funds: Mutual funds work similarly to ETFs, but they're not traded on major stock exchanges. Like ETFs, they're great for diversifying your portfolio without you having to do all the work.
- Real estate: Real estate can be an excellent place to put some of your retirement money because the real estate market has a low correlation with the stock and bond markets. In other words, it doesn't react the same way to economic conditions. If the stock market plummets, it's unlikely your real estate investments will too. You can invest directly in investment properties or use real estate investment trusts to achieve your goal.
Using Cryptocurrency to Supplement Your Retirement Savings
If you're interested in investing in cryptocurrency to supplement your retirement savings, you can open an account with a crypto exchange or traditional broker that offers cryptocurrencies and put a portion of your budget toward your crypto investments.
Make sure it's a small portion of your total investment strategy, though. Again, while crypto does have a high potential for short-term gains, it also has a high risk of big losses. And in the long run, the jury is still out on its reliability as an investment vehicle.
Above all else, it's important to do your due diligence with your long-term and retirement investing and to understand risks and rewards and to create a strategy that works best for you. Consider working with a financial advisor to determine the right approach and then stick to it.