popularity Cryptocurrency I grew up in the crowd In the last years. It even made some people think they were a good investment for retirement. In fact, according to the 2022 Investopedia Financial Literacy Survey, about a third of investors under the age of 55 plan to rely on cryptocurrency during retirement.
This might seem like a risky plan, given the volatility of the cryptocurrency market, and it is.
Luna was eliminated from Terra blockchain, a hugely popular stable digital currency, as early as 2022, He took over $17 billion worth of crypto with it. The price of the coin dropped from $116 to a fraction of a penny in a matter of days, making it among the most exciting cryptocurrency crashes ever. This is, in part, because the cryptocurrency is not legally backed by the government, and therefore is not protected by the Federal Deposit Insurance Corporation (FDIC).
The US Department of Labor has warned the retirement industry to exercise “extreme caution” when investing in cryptocurrencies, noting that trusted agents have a legal obligation under the Employee Retirement Income Insurance Act to protect individuals’ retirement savings. But some people are more comfortable taking risks than others and well-known players, such as Fidelity Investmentsthey note.
This year, Fidelity Investments, the largest retirement plan provider in the United States, became the first to add Bitcoin as an investment option in its 401(k) plans. Under their plan, investors will be able to allocate up to 20% of their retirement savings to bitcoin. But individual trustees may set their own employee contribution limits and a maximum allocation.
But just because it’s possible to invest in an asset like cryptocurrency for retirement doesn’t necessarily make it a good idea.
- It’s common to invest in cryptocurrencies, but putting bitcoin into a 401(k) is a new idea.
- Fidelity Investments recently announced that it is offering Bitcoin as an investment option in that it 401(k) plans by the middle of this year.
- A recent study by Investopedia revealed that a third of investors under the age of 55 will rely heavily on cryptocurrency during retirement.
Is cryptocurrency a good long-term investment?
The modern era of cryptocurrency began with the launch of Bitcoin in 2009. Since then, Bitcoin has seen an average annual return of 93.8%, which is impressive in the long run, but that doesn’t mean there are no hurdles in the way. In 2018, the return was -72.6%. And while they were the first investors to hold huge returns, not all currencies did well. With thousands of cryptocurrencies to choose from, investors have had mixed results, to say the least.
However, the cryptocurrency topped the list of best expected returns among those aged 18-55 in the 2022 Investopedia Financial Literacy Survey. Among millennials, 30% expect cryptocurrency returns to be on top of stocks, real estate, and mutual funds.
But time will tell if these expectations are actually established. At the moment, it is too early to tell whether the cryptocurrency will be a good long-term investment. For most investors under 55, their retirement is years away from any cryptocurrency. When you add to this the fact that those same investors who expect big returns don’t quite understand where they plan to put their money, it can be a bit worrying.
In an Investopedia survey, across age groups, more than 40% of respondents said cryptocurrency is too risky or too confusing. Among millennials, specifically, 44% say cryptocurrency is too confusing or too risky for their money. Meanwhile, 58% of baby boomers say cryptocurrency is too confusing. Less than half of millennials say they can explain how cryptocurrency works, while only 5% of baby boomers can explain cryptocurrency, and only 3% understand NFT well enough to share how they work with someone else.
So while cryptocurrency can obviously be a new and trendy asset class at times, it is also very risky and volatile. You may want to think twice before relying on cryptocurrency for retirement planning and consult a financial planner.
Cryptocurrency markets can follow patterns similar to those of stock markets, with cycles of ups and downs. But a bear market, or a crypto winter, can have lasting effects.
What to look for when choosing retirement investments
As you build your retirement portfolio, it is crucial to consider several fundamental factors, such as:
- Expected Growth Rate: The expected growth rate is one of the most important investment fundamentals. Stock and bond market investors rely on different valuation models to predict growth. This is more difficult with cryptocurrencies.
- Risks and Volatility: Both the stock and bond markets have decades of historical data and risk measurement frameworks. Not only are cryptocurrencies considered more risky and volatile than stocks or bonds, but their risk is also more complex to measure. The number of models available to measure cryptocurrency risk is limited.
- cash flow: Offers many predictable investments earnings, bond coupon payments, and other forms of cash flow. Here, many cryptocurrencies offer an advantage over more traditional investments thanks to staking and yield farming. However, it is possible that these newer systems may not work the same way ten to twenty years down the road 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 they 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 the investor? This depends on various factors. First, calculate your financial needs for retirement. Then identify the allocation of investments and contributions needed to achieve this.
Traditional investment strategies have focused on a combination of stocks and bonds to reach this goal for the typical investor, often relying heavily on 401(k) tax benefits and IRA . accounts. In addition to the IRA and Roth IRASome traditional brokerage firms have started adding cryptocurrency to their traditional retirement accounts. So if you have decided this is your way forward, consult a financial advisor before placing your money in such a risky asset.
Of all the investments in anyone’s life, retirement accounts are arguably the most important. And if you go big in the crypto space — or just invest in crypto for your retirement, and that asset class collapses as we saw in the last crypto winters — you may have to reconsider your current or future plans without prior notice.
Where the crypto fits with the investment plan
Given the risks, volatility, and difficulty of predicting the future of cryptocurrency, many investors should avoid including cryptocurrency in their retirement investments altogether. If you decide to include cryptocurrencies, it may be wise to keep them as a smaller part of your overall portfolio.
Unless you are a firm believer in cryptocurrency who wants to tap into the tax savings of a cryptocurrency IRA, it may be best for you to keep cryptocurrency as a relatively small part of your overall portfolio and out of your retirement.
Many investment experts Suggest Keep the bulk of your retirement assets in Stock marketpreferably in low and varied fees Exchange Traded Funds (ETFs). High-risk alternative investments are still fair game but are meant for the portion of your investments that are not critical to your future living.
Is It Possible To Plan For Retirement With Bitcoin?
Cryptocurrencies are popular these days, but putting bitcoins into a 401(k) is a new idea. Fidelity Investments recently announced It will begin offering bitcoin investment options in its 401(k) plans by mid-2022.
When building your cryptocurrency investment strategy, consider this scenario. If you invest $5,000 in cryptocurrency and it goes up 10x, you will get $50,000. This is a great comeback. But if it goes to zero, will that be enough to ruin your retirement plans? Mostly not.
While the $5,000 example works with some individuals or families, your investment portfolio, risk tolerance, and financial goals are unique. By understanding your investments and how each asset you own works, you can determine the ideal allocation for your retirement portfolio and other investments. Cryptocurrency may fit into one or both of these investment strategies. But if you plan to rely on assets for retirement, invest carefully.
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