Should Investors Put Crypto in Their Retirement Accounts?

The popularity of cryptocurrencies has grown among the masses in recent years. Some people even think they are a good investment for retirement. In fact, according to the 2022 Investopedia Financial Literacy Survey, roughly a third of investors under the age of 55 plan to rely on cryptocurrencies in retirement.

This may sound like a risky plan, considering the volatility of the crypto market, and it is.

The Terra blockchain moon, a once-popular stablecoin cryptocurrency, was delisted in early 2022, taking over $17 billion in crypto value. The price of the coin fell from $116 to a fraction of a cent in a matter of days, making it one of the most dramatic crypto crises on record. This is, in part, because cryptocurrencies are not government-backed legal tender and therefore not subject to Federal Deposit Insurance Corporation (FDIC) protection.

The US Department of Labor has warned the retirement industry to exercise “extreme care” when investing in cryptocurrencies, noting that plan fiduciaries are legally required under the Retirement Income Security Act. of Employees to protect people’s retirement savings. But some people are more comfortable with risk than others, and established players like Fidelity Investmentsthey are taking note.

This year, Fidelity Investments, the largest provider of retirement plans in the United States, became the first to add Bitcoin as an investment option in its 401(k) plans. Under his plan, investors will be able to allocate up to 20% of their retirement savings to bitcoin. But individual trustees can set their own employee contribution limits and allocation maximums.

But just because it’s possible to invest in an asset like crypto for retirement doesn’t necessarily mean it’s a good idea.

key takeaways

  • Investing in cryptocurrencies is trendy, but putting bitcoin in a 401(k) is a novel idea.
  • Fidelity Investments recently announced that it will offer bitcoin as an investment option in its 401(k) plans in the middle of this year.
  • A recent Investopedia survey revealed that a third of investors under the age of 55 will rely heavily on cryptocurrencies in 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 had an average annual return of 93.8%, which is pretty impressive in the long run, but that doesn’t mean there weren’t any bumps in the road. In 2018, the return was -72.6%. And while the early investors who stuck around made massive gains, not all coins fared so well. With thousands of cryptocurrencies to choose from, investors have had mixed results, to say the least.

That said, cryptocurrencies topped the list of best expected returns among 18-55 year olds in the 2022 Investopedia Financial Literacy Survey. Among millennials, 30% expect cryptocurrency returns to outperform stocks, real estate and mutual funds.

But time will tell if those expectations are grounded in reality. For now, it is too early to know if cryptocurrencies will be a good long-term investment. For most investors under the age of 55, retirement is more years away than any cryptocurrency. When you add to that the fact that those same investors hoping for big returns don’t fully understand where they plan to put their money, it can be a bit alarming.

In the Investopedia survey, across all age groups, more than 40% of respondents said that cryptocurrencies are too risky or confusing. Among millennials, specifically, 44% say that cryptocurrency is too confusing or risky for their money. Meanwhile, 58% of baby boomers say that crypto is too confusing. Less than half of millennials said they could explain how crypto works, while only 5% of baby boomers can explain crypto, and only 3% understand NFTs well enough to share how they work with someone else .

So while it is clear that cryptocurrency can be a new and sometimes trendy new asset class, it is also extremely risky and volatile. You may want to think twice before leaning on crypto for your retirement planning and consult a financial planner.

Cryptocurrency markets can follow patterns similar to stock 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 build your retirement portfolio, it’s critical to consider several essential factors, such as:

  • Expected growth rate: An important fundamental investment is the expected growth rate. Stock and bond investors rely on various valuation models to predict growth. That is more complicated with cryptocurrencies.
  • Risk and volatility: Both the stock and bond markets have decades of historical data and risk measurement frameworks. Cryptocurrencies are not only 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 staking and yield farming. However, these new systems may no longer function in the same way ten or twenty years from now when 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 must 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 several factors. First, calculate your financial needs for retirement. Then determine the allocation of investments and contributions needed to get there.

Traditional investment strategies have focused on a mix of stocks and bonds to achieve this goal for the typical investor, often relying heavily on tax-advantaged IRAs and 401(k)s. In addition to fully self-directed, crypto-specific IRAs and Roth IRAs, some traditional brokerage firms are beginning to add crypto to traditional retirement accounts. So if you are sure this is your way forward, consult a financial advisor before investing your money in such a risky asset.

Of all the investments in anyone’s life, retirement accounts are possibly the most important. And if you go big with crypto, or just invest in crypto alone for your retirement, and that asset class goes bankrupt as we’ve seen in recent crypto winters, you may be forced to reconsider your current or future plans on short notice. .

Where Crypto Fits Into An Investment Plan

Due to the risk, volatility, and difficulty in predicting the future of cryptocurrencies, many investors should avoid including cryptocurrencies in their retirement investments. If you decide to include cryptocurrencies, you may want to keep them as a smaller portion of your overall portfolio.

Unless you’re a firm believer in crypto and want to take advantage of the tax savings of a crypto IRA, you’re better off keeping crypto as a relatively small portion of your overall portfolio and out of your retirement.

Many investment experts suggest keeping most of your retirement assets in the stock market, preferably in low-cost, diverse exchange-traded funds (ETFs). High-risk alternative investments are still fair game, but they are reserved for a portion of your investments that are not critical to your future livelihood.

Is it possible to plan retirement with Bitcoin?

Cryptocurrencies are popular these days, but putting bitcoins in a 401(k) is a new idea. Fidelity Investments recently announced that it would begin offering bitcoin investment options in its 401(k) plans in mid-2022.

The bottom line

When developing your cryptocurrency investment strategy, consider this scenario. If you invested $5,000 in crypto and it grew 10x, you would have $50,000. That’s a great comeback. But if it hit zero, would it be enough to wreck 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 decide on the ideal allocation for your retirement portfolio and other investments. Cryptocurrency can fit into one or both of those investment strategies. But if you plan to rely on assets for retirement, invest carefully.


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