Should Retirees Invest in Cryptocurrency?

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Cryptocurrencies have gained immense popularity over the past few years. The digital currency has gained so much acceptance that it is now starting to show up as an alternative asset class in some 401(k) plans. Such developments have left many wondering – should retirees invest in cryptocurrency?

In this article, we will evaluate the pros and cons for retirees to invest in cryptocurrency.

Pros Of Investing In The Crypto Market

No doubt, the biggest benefit of adding crypto to a retirement portfolio is the potential to make massive gains. Bitcoin, for instance, was the best performing asset class from 2011 to 2021, delivering annualized returns of 230%. During that period, the next best asset class returned just about 20% on an annualized basis.

Such a level of gains means if an investor is late with his or her retirement investment, or is planning to retire early, then investing in crypto could help investors reach their investment goals in time.

In other words, if an investor chooses the usual investing route, then he or she would need to remain invested for about 30 years. In contrast, investing in Bitcoin could allow you to achieve your investment goals in about 10 years.  

Another point in favor of cryptocurrency investment is its growing acceptance, including in some 401(k) plans. Fidelity Investments and ForUsAll, which administer workplace retirement plans, are now offering some cryptocurrencies, such as Bitcoin, to 401(k) investors.

Fidelity Investments, the largest retirement plan provider in the United States, allows investors to allocate up to 20% of their retirement savings into BTC. However, individual fiduciaries could create their own employee contribution limits and allocation maximums.

ForUsAll partnered with Coinbase to allow employees to invest as much as 5% of their accounts into cryptocurrencies via a so-called brokerage window.

One more thing that could go in favor of cryptocurrencies is the Financial Freedom Act. Lawmakers reintroduced the act in mid-February to allow Americans to invest their retirement savings in whatever they want, including crypto.

Cons Of Investing In The Crypto Market

Volatility with cryptocurrencies is their biggest drawback. When it comes to crypto, the disclaimer – “past returns are not a reliable predictor of future returns” – holds true. Even with Bitcoin, the biggest cryptocurrency with a nearly 15-year track record, you can never be sure of its future performance.

Crypto investors have witnessed the same level of volatility over the past two years. 2021 was the best year for the crypto market, with almost every crypto hitting their all-time highs. Then came 2022, when almost every major crypto witnessed a loss in value, including Bitcoin (which lost about 65% last year).  So, if you had put your hard-earned savings in BTC, then it would have been largely wiped out.

Terra blockchain’s Luna is another example of how cryptocurrencies can be disastrous. Luna, which was once a popular stablecoin cryptocurrency, crashed in 2022, taking with it more than $17 billion in crypto value. In a matter of days, the coin’s value dropped from $116 to a fraction of a penny.

Thus, with so much volatility around, you will always have doubts of whether you will achieve your investment objectives. The moment you believe you have reached your retirement savings goals, the extreme volatility in the crypto market could push you way behind.

Another drawback of adding crypto to a retirement portfolio is that there aren’t many professional options available. Unless the labor department approves investing in crypto, employers will be hesitant to offer this digital asset to their employees. Moreover, it would expose employees to all the issues prevalent in the crypto market.  

Thus, employees who want to invest in cryptocurrencies need to do it on their own, and this would mean opening an account with a cryptocurrency exchange, and then selecting the cryptocurrencies for investment.

The lack of clear regulations surrounding cryptocurrencies is another reason why retirees should stay away from this asset class. No clear regulations make cryptocurrencies more speculative, and thus, investors should be cautious while investing in cryptocurrencies when they are close to retirement.

Moreover, the U.S. Department of Labor has already issued a warning for the retirement industry to practice “extreme care” when investing in crypto.

“Today’s announcement reminds plan fiduciaries of their important role in selecting investment options for 401(k) plan menus,” said Ali Khawar, Employee Benefits Security Administration Acting Assistant Secretary, in a press release. “At this stage of cryptocurrency’s development, fiduciaries must exercise extreme care before including direct investment options in cryptocurrency.”

Should Retirees Invest In Cryptocurrency?

Cryptocurrencies, no doubt, are an emerging asset class. Early investors in BTC have realized massive returns, but not all coins have fared so well. It wouldn’t be wrong to say that investors have had mixed results with cryptocurrencies so far.

Many expect crypto returns to beat stocks, real estate, and mutual funds, but only time will tell if these expectations can hold in the long term. As of now, it is too early to comment on whether cryptocurrencies will be a good long-term investment, especially for retirees.

Thus, for now, we believe retirees would be better off by staying away from cryptocurrencies.

How Much Should You Invest In Crypto?

Despite the risk and volatility, if retirees want to include cryptocurrencies in their portfolio, then it is recommended that they invest only a small portion of their overall portfolio in crypto. A small portion here means a loss that you are okay with.

For example, your retirement portfolio is worth $1 million and you invest a mere $1,000 in cryptocurrency. If the crypto gives a 10x return, then that’s great, but if it were to go to zero, your retirement plans won’t feel the pinch.

Many financial advisors recommend investing up to 5% in crypto. This 5% rule will ensure that the majority of your retirement portfolio is invested in less risky and less speculative assets.