Should investors put crypto in their retirement accounts?

The popularity of cryptocurrencies has grown among the masses in the later years. It has even led some to believe that they are a good investment for retirement. In fact, according to the 2022 Investopedia Financial Literacy Survey, roughly one-third of investors under the age of 55 plan to rely on cryptocurrency during retirement.

This may sound like a risky plan, considering the volatility of the crypto market, and it is.

Terra blockchain’s luna, a once popular stablecoin cryptocurrency, was wiped out in early 2022, bringing with it more than $17 billion in crypto value. The coin’s price fell from $116 to a fraction of a penny in a matter of days, making it one of the most dramatic crypto crashes on record. That’s partly because crypto is not legal tender backed by the government, and thus not subject to Federal Deposit Insurance Corporation (FDIC) protection.

The US Department of Labor has warned the retirement industry to exercise “extreme caution” when investing in crypto, pointing out that plan administrators have a legal obligation under the Employee Retirement Income Security Act to protect people’s retirement savings. But some people are more comfortable with risk than others and the established players, such as Fidelity Investmentsnotice.

This year, Fidelity Investments, the largest provider of retirement plans in the United States, became the first to add Bitcoin as an investment option to its 401(k) plans. Under their plan, investors will be able to allocate up to 20% of their retirement savings to bitcoin. But the individual trustees can determine their own employees’ contribution limits and allocation maximum.

But just because it’s possible to invest in an asset like crypto for retirement doesn’t necessarily make it a good idea.

Is cryptocurrency a good long-term investment?

The modern era of cryptocurrencies began with the launch of Bitcoin in 2009. Since then, Bitcoin has had an average annual return of 93.8%, which is pretty impressive in the long run, but that doesn’t mean there weren’t bumps in the road. In 2018, the return was -72.6%. And while early investors who have held on have realized massive returns, not all coins have fared so well. With thousands of cryptocurrencies to choose from, investors have had mixed results, to say the least.

That said, crypto topped the list of best expected returns among those aged 18 to 55 in the Investopedia Financial Literacy Survey 2022. Among millennials, 30% expect crypto returns to top stocks, real estate and mutual funds.

But time will tell if these expectations are founded in reality. For now, it is too early to know if cryptocurrency will be a good long-term investment. For most investors under the age of 55, retirement is more years away than any cryptocurrency is years old. When you add the fact that the same investors who expect big returns don’t fully understand where they plan to put their money, it can be a bit alarming.

In Investopedia’s 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 risky for their money. Meanwhile, 58% of baby boomers say cryptocurrency is too confusing. Less than half of millennials said they could explain how cryptocurrencies work, while only 5% of baby boomers can explain cryptocurrencies, and only 3% understand NFTs well enough to share how they work with someone else.

So while it’s clear that cryptocurrency can be a new and sometimes trendy new asset class, it’s also extremely risky and volatile. You may want to think twice before leaning on crypto for your retirement planning and consult a financial planner.

What to look for when choosing pension investments

When building your pension portfolio, it is important to consider several important factors, for example:

• Expected growth rate: An important investment foundation is the expected growth rate. Stock and bond investors rely on different valuation models to predict growth. It is more difficult with cryptocurrencies.
• Risk and volatility: Both stock and bond markets have several decades of historical data and frameworks for risk measurement. Not only are cryptocurrencies riskier and more volatile than stocks or bonds, but measuring their risk is also more complex. The number of models available to measure cryptocurrency risk is limited.
• Cash flow: Many investments offer predictable dividends, bond coupon payments and other forms of cash flow. Here, several cryptocurrencies give an advantage over more traditional investments thanks to staking and yield farming. However, it is possible that these newer systems will no longer work in the same way in ten to twenty years when a person retires.

Of course, just because something is new and unproven doesn’t necessarily mean it’s a bad investment. The final decision on where to put money is up to the investor, so they should weigh the pros and cons each time before making a decision.

How to build a core retirement strategy

What is the appropriate investment amount for an investor? It depends on various factors. First, calculate your financial needs for retirement. Then determine the allocation of investments and contributions needed to get there.

Traditional investment strategies focused on a combination of stocks and bonds to achieve this goal for the typical investor, often relying on tax-advantaged 401(k) and IRA accounts. In addition to crypto-specific and fully self-directed IRAs and Roth IRAs, some traditional brokerage firms are beginning to add cryptocurrency to traditional retirement accounts. So if you are determined that this is the way forward, consult a financial advisor before putting your money into such a risky asset.

Of all the investments in someone’s life, retirement accounts are arguably the most important. And if you’re going big on crypto — or you’re only investing in crypto for your retirement and that asset class crashes like we’ve seen in recent crypto winters — you may be forced to rethink your current or future plans at short notice.

Where crypto fits into an investment plan

Due to the risk, volatility and difficulty in predicting the future of cryptocurrency, many investors should avoid including crypto in their retirement investments. If you decide to include cryptocurrencies, you may want to keep them as a smaller part of your overall portfolio.

Unless you are a strong believer in cryptocurrency and want to take advantage of the tax savings of a cryptocurrency IRA, you may be better off keeping cryptocurrency as a relatively small part of your overall portfolio and outside of retirement.

Many investment experts suggest keeping the bulk of your retirement funds in the stock market, preferably in low-fee, diversified exchange-traded funds (ETFs). Alternative high-risk investments are still fair, but reserved for a portion of your investments that are not critical to your livelihood in the future.

The bottom line

When building your cryptocurrency investment strategy, consider this scenario. If you invested $5,000 in cryptocurrency and it went up 10x, you’d have $50,000. That’s a great return. But if it went to zero, would that be enough to ruin your retirement plans? Probably not.

While the $5,000 example works for some individuals or households, your investment portfolio, risk tolerance and financial goals are unique. By understanding your investments and how each asset you own performs, you can decide on the ideal allocation for your retirement portfolio and other investments. Cryptocurrency can fit into one or both of these investment strategies. But if you plan to rely on assets for retirement, invest with caution.