Can Bitcoin Help You Retire Early?

Cryptocurrencies such as Bitcoin (BTC 1.98%) has the potential to completely redefine the way individual investors think about retirement. This is for one simple reason: Bitcoin has a proven ability to deliver the kind of sky-high, stratospheric returns that are simply not possible through conventional stocks and bonds. As a result, some investors are now looking at Bitcoin as a possible tool to help them retire early.

But how realistic is this assumption? After all, as we have seen in 2022, cryptocurrencies and crypto institutions can crash at any time, often without any prior warning. With that in mind, here are some things to consider if you’re thinking about Bitcoin as a possible retirement option.

Risk factors

While it is true that Bitcoin has increased by more than 16,229% since 2013, it is also true that Bitcoin is subject to huge volatility swings. Throughout its existence, Bitcoin has had at least five different periods when it crashed significantly. During the first of these crashes, Bitcoin fell from $32 to $0.01 in just a few days.

How comfortable would you be if your retirement fund crashed to zero, with no apparent warning, in a matter of days? Therefore, the first thing to keep in mind is the trade-off between risk and reward.

You should also consider your retirement time horizon. Investing in Bitcoin is much different for a younger investor with decades left until retirement than an older investor closer to retirement. For example, younger investors are much better prepared to weather the current crypto winter than older investors. They can patiently wait for Bitcoin to recover and then go on another of their amazing stratospheric runs. Given that previous Bitcoin bear cycles have lasted as long as 37 months, older investors may simply not have that long to wait.

Do-it-yourself retirement

Finally, another factor to keep in mind is how best to implement a Bitcoin retirement strategy. The cornerstone of any retirement plan is usually a defined contribution plan from an employer or an IRA from a major financial institution. Right now, such retirement options simply do not exist for crypto investors.

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Yes, Fidelity Investments announced earlier this year that it would offer Bitcoin investment options for employer 401(k) plans, but many employers have said they will pass on those options due to the perceived risk involved. Employers are expected to act as fiduciary custodians of employees’ retirement funds, and adding Bitcoin into the mix puts them at potential risk. In the wake of FTX collapse, three US senators are now asking Fidelity to reconsider its Bitcoin 401(k) offerings.

In addition, New York Attorney General Letitia James has become a very vocal critic of cryptocurrencies in pension funds. She now recommends against crypto in any IRAs or savings plans, such as 401(k) plans. Her opinion is important, given the role of New York City in the financial world. Other states may follow her lead, and that will make it even more difficult to find regulated, reliable Bitcoin retirement options.

For now, using crypto for retirement is very much a do-it-yourself proposition. You won’t have a financial advisor to guide you along the way, and you won’t have access to safe investment products specifically designed for retirement. Most likely, you will put your money on a cryptocurrency exchange and do your own trading. Let’s just hope the cryptocurrency exchange you choose doesn’t turn out to be the next FTX!

Early retirement, with an asterisk

As you may have guessed by now, using Bitcoin as your sole means of retirement savings is problematic at best. It will require a do-it-yourself approach that manages to time the market just right, to avoid a market crash right before retirement. It will also take some luck to protect the full amount of your retirement savings in a Wild West, unregulated financial environment where things can and do go wrong.

That said, Bitcoin can be a way to turbocharge your retirement savings. For example, let’s say you planned to retire at age 65 and had already accumulated sufficient retirement savings to make that possible. You can then distribute Bitcoin as a way to accelerate this retirement date. Or, for individual investors who failed to save all the way to retirement, Bitcoin could offer a last-ditch, Hail Mary attempt to amass decades of retirement savings in just a few years.

Just remember that there is a huge amount of risk involved with any crypto investment strategy. Yes, the rewards can be sky high, but you have to be willing to hibernate through the long crypto winters as well.