Should crypto be part of your retirement plans?

At the basic level, the goal of investing money today is to someday in the future receive a greater amount of capital, or return, on the initial outlay. The future might include plans to make a big purchase like a car or a house, but usually it’s for retirement. Investors must consider which assets to own to increase the chances of achieving their financial goals.

The opportunity set consists of shares and bonds. But recently a new asset class has emerged as a possible investment option. Let’s take a closer look at whether or not cryptocurrencies should be part of your retirement plans.

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The answer varies for everyone

Ever since Great recession ended in 2009, investors have had to contend with a historically low interest rate environment, making the search for yield a top priority. For fixed-income investors, this has been a difficult situation. But for equity investors, the easy-money policy of the past decade has resulted in S&P 500 produced an annual total return of 13.2% over the past 10 years. This performance easily beats the broader index’s historical return of approximately 10% per year.

But cryptocurrencies promise even greater fortunes for those brave enough to follow the trend. Bitcoin and Ethereum, the world’s two most valuable digital assets, have produced five-year returns of 942% and 604% respectively. These numbers easily exceed the S&P 500, attracting the attention of those looking to invest in the nascent asset class.

If you are a younger person who has several decades before retirement, then I think it would be perfectly prudent to allocate a certain percentage of a well-diversified portfolio to cryptocurrencies. How much depends on your risk tolerance, but I would say no more than 5%. As you become more comfortable and knowledgeable about the space, increasing this allocation may be the right move. A younger person can afford to take more risks and be more aggressive thanks to an extended time horizon.

Someone nearing or in retirement, on the other hand, should be much more conservative with their investment approach. In fact, I would go so far as to suggest avoiding cryptocurrencies altogether. The rationale is quite simple. Cryptocurrencies are incredibly volatile, as many observers know. The entire digital asset market has lost roughly two-thirds of its value in the past eight months. Having a large amount of money invested here that you will need in a short period of time is probably not a smart move.

Then there is the idea of Stake your crypto or invest it in decentralized finance protocols with the intention of earning a return, such as an interest-bearing instrument, on your assets. While the prices paid to investors here can be much higher than what is usually offered in the traditional financial industry, the risk is undoubtedly greater.

First, investor protection provided by the Federal Deposit Insurance Corporation or the Consumer Financial Protection Bureau is non-existent in the crypto world. Moreover, today we see how bad things can take a turn for the worse. Plagued crypto lender Celsius just filed for Chapter 11 bankruptcy protection, and it has frozen customer accounts for nearly a month due to market conditions.

Someone earlier in their investment journey has plenty of time to recover financially if they experience a significant decline in crypto assets. However, a pensioner is not so lucky. As with all financial decisions, one must consider risk tolerance, time horizon and annual cash outlays. Knowing this critical information will help determine the types of investments that will be made, leading to the ultimate goal of financial freedom.