With the rise of emerging technologies and corporations, our world is becoming increasingly digitalized, leading to significant changes in how we invest and spend money. The traditional methods of investment have undergone a transformation, as millennials and Generation Z now prioritize a more logical and practical approach to securing their future. This has resulted in a growing preference for long-term investments in digital currencies, commonly known as cryptocurrency. Cryptocurrency refers to any form of currency that exists digitally, utilizing cryptography to ensure secure transactions. It is stored in digital wallets and can be accessed using a private key, which can be accessed either through online software or through a physical device. Thus, a crucial question arises regarding the viability of cryptocurrency as an option for retirement plans and its safety as an investment. Below are three points to consider in addressing this matter.
1. A favorable return on investment.
No longer can you anticipate retiring at 60 and then strategizing for the future. Today, individuals are employing savvy work and, more significantly, wise investment strategies to secure the utmost advantages at a younger age. Young investors are accumulating popular cryptocurrencies such as Bitcoin and Ethereum as their retirement funds, aiming to attain financial stability in the digital realm for post-retirement benefits. Unlike traditional retirement savings plans, cryptocurrencies offer not only dividends but also potential gains from their price appreciation.
Unlike stocks, which are traded only during business hours, crypto can be traded at any time. Additionally, while stocks are directly impacted by inflationary pressures, crypto can serve as a hedge against inflation. Millennial investors who are seeking early retirement investment opportunities can bear the effects of depreciation and upswings over the short to longer-term, as long as they have at least a minimal market orientation. It is also risky to keep all of your investment eggs in one basket, so adding crypto to your investment portfolio can help diversify it. However, it is crucial to choose cryptocurrencies with long-term potential, such as Ethereum and Bitcoin.
2. Asset for storing value
Cryptocurrency has evolved beyond its role as a digital currency and is now considered a valuable asset. Wealth investment firms are creating loan products based on cryptocurrency that are accessible to all individuals, not just institutional retail investors. Additionally, cryptocurrencies are being recognized as a secure means of preserving value and protecting against inflation. A study conducted by KuCoin, a popular cryptocurrency exchange, reveals that 27% of Americans aged 18 to 60 have engaged in cryptocurrency ownership or trading for at least six months. Certain countries, such as El Salvador, have fully embraced cryptocurrencies and even adopted them as legal tender. It is possible that other nations will follow El Salvador’s example and also legalize the use of cryptocurrencies.
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The prices of cryptocurrencies have surged in recent years, presenting a potential opportunity for both corporations and individuals to build wealth. In order to promote the use of cryptocurrencies, companies have introduced retirement plans that include cryptocurrencies for their employees. Fidelity Investments, an American financial services company, has permitted users to allocate 20% of their retirement savings to investments backed by Bitcoin through their 401(k) retirement accounts, as stated by the Congressional Research Service. These retirement accounts are sponsored by employers, allowing employees to contribute. Many other companies have adopted similar plans, considering them to be a practical model.
In the event that a country’s physical flat currency depreciates in value in the global marketplace, cryptocurrencies can potentially offer stability. Despite facing reluctance and criticism, the market exhibits substantial demand for cryptocurrency.
At the moment, its worth exceeds USD 1 trillion, with over 20,700 cryptocurrencies accessible for investment and trading on 520 different exchanges. Alongside conventional cryptocurrency trading, various novel investment opportunities like metaverse, non-fungible tokens (NFTs), Web3, Defi, and stable coins have emerged. These options can potentially serve as retirement savings for the future.
Does Bitcoin Belong in Your Retirement Portfolio?
The reintroduction of the Financial Freedom Act by U.S. lawmakers in mid-February has sparked renewed discussion on the inclusion of crypto in retirement plans. The objective of this act is straightforward – to enable Americans to have the freedom to invest their retirement savings as they wish, including the option to invest in cryptocurrency.
However, there is one issue with that plan. Currently, the U.S. Department of Labor advises employers not to include any cryptocurrency options in their 401(k) plans. Additionally, in early February, the SEC, the North American Securities Administrators Association, and the Financial Industry Regulatory Authority cautioned against exposing self-directed individual retirement accounts (IRAs) to cryptocurrencies. Keeping this in consideration, let’s examine the advantages and disadvantages of incorporating cryptocurrencies like Bitcoin (BTC 0.13%) into your retirement portfolio.
Pros of adding crypto to your retirement portfolio
Including cryptocurrency in a retirement portfolio offers a remarkable benefit, which is the potential for significantly transformative profits. To illustrate, Bitcoin emerged as the highest-performing asset class worldwide from 2011 to 2021, with a considerable margin. During that period, investors witnessed Bitcoin deliver an annualized return of 230%, while the second-best asset class (big tech stocks) yielded merely 20% on an annualized basis.
If you are not meeting your retirement savings goals or if you have intentions of retiring early, the appeal of investing in cryptocurrency becomes evident. Instead of investing for a lengthy period of 30 years in a relatively secure asset class and consistently generating returns to save for retirement, Bitcoin provides the potential opportunity to invest for a shorter duration of around 10 years and accumulate a substantial nest egg for a comfortable and permanent retirement.
Cons of adding crypto to your retirement portfolio
This line of thinking makes two assumptions which may not hold true for crypto. Firstly, it assumes that historical returns are a dependable indicator of future returns. However, given the relatively brief history of cryptocurrencies, this assumption becomes uncertain. While Bitcoin has a track record of almost 15 years, newer altcoins emerge and disappear frequently. Additionally, the future performance of Bitcoin remains ambiguous.
Additionally, disregarding the high volatility of the crypto market, you are risking a substantial portion of your retirement funds by investing in cryptocurrencies. It is possible that just when you believe you have achieved your desired retirement savings, your valuable nest egg could be unexpectedly lost.
The past couple of years provide a vivid demonstration of how this unpredictability influences the market. Following a remarkable year in 2021, during which almost every cryptocurrency reached its peak value, the crypto market encountered a nightmarish phase in 2022. Almost all significant cryptocurrencies, including Bitcoin, experienced a decline of 65% or more last year. This implies that if you were relying on cryptocurrency to fund your retirement, your savings would have been significantly diminished.
Adding Bitcoin to your retirement portfolio carries a significant drawback due to the limited number of formal options offered by leading financial institutions. Until the U.S. Department of Labor grants approval to cryptocurrency for 401(k) plans, employers will be hesitant to provide such plans. Their primary obligation is to safeguard their employees’ interests, and currently, crypto is not regarded as a responsible means to fulfill that fiduciary duty.
Consequently, individual investors are forced to adopt a do-it-yourself strategy. This essentially entails creating an account with a prominent cryptocurrency exchange and allocating all funds in that account for retirement purposes. However, what if that cryptocurrency exchange goes under, similar to the situation with FTX (FTT 2.99%)? Alternatively, suppose you invest in numerous speculative altcoins rather than more reputable options like Bitcoin due to the absence of professional investment guidance.
Shifting sentiment in Washington?
Given the information provided, it becomes evident why there is currently a heated discussion surrounding the inclusion of cryptocurrencies in retirement accounts. There are two opposing viewpoints on this matter. On one side, there are proponents of a free market who argue that the government should not interfere, and the future of cryptocurrencies should be determined by the free market itself. They often reference Fidelity Investments as an example, as the company took the lead in April 2022 by introducing retirement plans that include cryptocurrencies for employers.
However, there are those who support government intervention and believe that the government plays a crucial role in safeguarding individual investors against losing their retirement savings. They use incidents such as the recent FTX crisis as evidence that investing in cryptocurrency is filled with danger.
The 5% rule
It is advisable to monitor this area as there might be changes in the near future if the Financial Freedom Act is approved. As of now, a general guideline for self-directed individual investors is that the highest portion of their retirement savings allocated to cryptocurrency should be 5%. This limit is currently suggested by numerous financial advisors, and it guarantees that the majority of your retirement portfolio is invested in assets that are less speculative and carry lower risks. Consequently, in the unlikely scenario of Bitcoin becoming worthless, your retirement portfolio will not suffer a complete devastation.
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