It is now allowable to add cryptocurrency to your retirement portfolio. But should you? Bitcoin is the most well-known cryptocurrency, and Ethereum is a close second. Cryptocurrency, which only exists digitally, works by utilizing an encrypted algorithm to send payments, which makes it more secure and without the need for a third party such as a bank or financial institution.
It is important to understand cryptocurrency and the pros and cons of using it for investing, and especially for retirement planning. For the sake of simplicity, I will use Bitcoin as an example throughout this article. The question is whether a retirement portfolio is a good place for investing in cryptos.
To start, it is important to understand what cryptocurrency is and how it is valued. Each Bitcoin has a designated value, which rises and falls similar to the way that the value of a dollar rises and falls. This value is based on a seller’s willingness to accept it for the goods sold or how much investors are willing to pay for a Bitcoin.
A single Bitcoin may be worth $39,000 and can be subdivided, depending on the value of the transaction, down to a trillionth of its value. That is unlike the dollar, which can only be subdivided by a hundredth of its value (a penny) at most.
Bitcoins are handled digitally and managing transactions using Bitcoins are almost impossible to be forged. Accounts (called wallets) using Bitcoin are private. All cryptocurrencies use blockchain technology, which is a digital system that has the total history of all past transactions from the beginning to the present. As such, cryptocurrency accounts are not part of a bank. The user maintains the transaction. There is no government, corporation or central bank that has access to a person’s funds or personal information.
There are some disadvantages with cryptocurrencies. Due the privacy of the cryptocurrency transaction, money laundering and tax evasion are possible, although past attempts have been discovered and prosecuted.
Because cryptocurrency is digital, there is no physical cash that can accessed. And should a computer crash, a cryptocurrency balance could be wiped out unless a backup copy of the holdings had been made.
In addition, the value of cryptocurrency can swing wide. It is important to note that cryptos have had historically high returns over the last few years. In addition, cryptos are not correlated to the stock market which means that they may help offset a stock market crash while providing a risk-adjusted return. Although cryptos are doing well currently, they can drop precipitously and cause a panic sell-off. If you would like more information on cryptocurrency, you can refer to this website: corporatefinanceinstitute.com/resources/knowledge/other/cryptocurrency.
If you are planning to add cryptos to your retirement plan it is especially important to know your risk tolerance. If you are retiring in 15 to 20 years, then crypto (as a small percentage, say 1% to 5%) may be a wise choice if you can manage downside risk. However, due to the volatility of crypto’s value, it may be unsuitable for someone who will retire in five to 10 years.
It may be best to consider cryptos as you would a dessert after a fine meal. A little bite goes a long way. If you have a financial planner, he or she may be better able to determine the right portfolio mix for your retirement. As a last word of caution, do not plunge into the unknown with cryptocurrencies unless you have done your homework and understand the risks.
