Adding Cryptocurrency to Retirement Portfolios

One of the most important parts of preparing for retirement is making sure that you have enough money to last your retirement. This is known as your retirement portfolio. You invest money in various places throughout your career, the funds hopefully grow inside the investments, and then you have enough to retire.

Most retirement plans (especially employee-sponsored plans) limit investments to traditional assets such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs). However, a self-directed retirement plan lets you broaden the scope. This means a lot of people consider adding cryptocurrencies to their retirement portfolios. Whether or not that’s right for you depends on several factors.

What Are Cryptocurrencies?

Cryptocurrencies are digital currencies that don’t rely on banks to verify transactions. Instead, they trade securely on a peer-to-peer system and run on a distributed ledger called the blockchain. This maintains a record of all transactions. 

Unlike more traditional investments, they do not derive their value from dividends or earnings. Instead, the value of a cryptocurrency is based on factors like market sentiment, scarcity, adoption numbers, and security. 

There are many types of cryptocurrencies, and they have different values. Some of the most common are Bitcoin and Ethereum, but there are thousands of other options. 

You can buy cryptocurrency from many traditional brokers or through cryptocurrency exchanges. Many self-directed individual retirement accounts (IRAs) also allow you to invest in crypto. 

If you’re thinking about investing in Bitcoin or other cryptocurrencies, you’ll want to consider both the potential benefits and possible downsides of doing so.

Potential Benefits of Cryptocurrency Investing

When you’re thinking of the benefits of cryptocurrency investing, the main one to consider is its potential. Over the year, many cryptocurrencies have risen in value considerably. If you look back over the last decade or so, there aren’t many assets that have outperformed Bitcoin, for instance. When something is returning value at such a high rate, it’s certainly worth consideration.

However, it’s important to note that past performance doesn’t mean future performance. As cryptocurrencies are relatively new, it’s hard to understand what they will do in the future. There simply isn’t enough historical information to count on.

Another benefit is that cryptocurrency isn’t tied to the stock market, the real estate market, or any other traditional financial system. This makes it an interesting diversification addition. If you’re looking for an asset that isn’t connected to other markets, cryptocurrency could be a good choice. 

Possible Drawbacks to Consider

One of the biggest potential downsides to cryptocurrency investments is that they are highly volatile. While speculation and public sentiment factor into the value of many different assets (not just digital ones), many other assets are also based at least partially on dividends or earnings. Cryptocurrency tends to change value based on more abstract factors.

While many types of crypto (particularly Bitcoin) have increased considerably over the last few years, there is still a lot of up and down to contend with. No asset is guaranteed to go up indefinitely forever, but there seems to be a lot more volatility baked into many cryptocurrencies. 

Cryptocurrencies also don’t follow traditional markets, so they trade 24/7 and that can sometimes increase their volatility. 

There is also the knowledge and experience gap to contend with. A lot of people, including experienced investment professionals, are still unsure of the details of cryptocurrency trading. 

Having the Right Cryptocurrency Investment Strategy

If you’ve decided to add cryptocurrency investments to your retirement portfolio, it’s important to follow a strategy. Much like with any other investment, it’s a good idea to diversify. Placing all your retirement savings in a single area (whether cryptocurrency or another single investment) generally isn’t advisable. 

It’s also important to consider your risk tolerance, as with any investment. Some cryptocurrencies can be especially volatile, with their value going up and down often and fluctuating greatly. If you’re at a point where your retirement account should be protecting your assets (such as if you are close to retirement age), then you may not want to consider a crypto investment. 

However, if you have a greater risk tolerance (and can handle your investment potentially going down), crypto investments pay be a good opportunity. If that’s the path you decide to take, you’ll want to fully research the asset and make sure that it’s right for you.

You want to make sure that whatever investments you decide to make, you’re still able to make long-term plans for a stable and sustainable future.