Should you Include Bitcoin in your Retirement Portfolio?

The spectacular rise of Bitcoin since its launch in 2009 is often equated in investing circles to a gold rush. Within a very short span, this unique digital asset has made its own billionaires, such as the Winklevoss Twins, while ruining many others in the quest to capture quick growth. Cryptocurrencies have become so popular that some supporters claim they have attained asset class status. An asset class is a group of securities or investments that have similar characteristics and exhibit similar behavior, like equities or fixed income, or even real estate. Asset classes form the base for asset allocation strategies formulated to help investors maximize gains and reduce risk by spreading the portfolio investments across different non-correlated assets. That way, the potential loss from one asset class is compensated by the price rise in another. While cryptocurrency continues to bedazzle investors with unprecedented gains, and also confuse the market with its volatility in price, some believe that adding small portions of a popular cryptocurrency like Bitcoin to their portfolio mix may yield better total returns on investment.

Bitcoin is the world’s most popular cryptocurrency. Created in 2009 by an unknown inventor who goes by the pseudonym Satoshi Nakamoto, it had the first-mover advantage and has exploded in the market. Young tech-savvy investors find appeal in its decentralized mode of operation. Cryptocurrencies are also not tied to any bank or Government. There are no middlemen controlling transactions between paying and receiving as banks do with traditional currency. As a virtual form of currency, Bitcoin has quickly gained popularity as more and more companies started accepting payments in Bitcoin for goods and services. For example, you can purchase Microsoft programs using Bitcoin and can pay for your food at Burger King or Subway in Bitcoin. Tesla has also been vocal about considering accepting cryptocurrency as a form of payment. Cryptocurrency is touted as the future of currency, even though Governments of some countries like Qatar, Vietnam, Saudi Arabia, and Pakistan have placed blanket bans on it. 

That said, it is imperative to understand that there is no fundamental principle to Bitcoin – the digital coin – and price movement works purely on a demand and supply basis. This means it is impossible, just yet, to figure out which direction the crypto market will move in. Nevertheless, investors have now started to mull over including cryptocurrencies in their portfolios. Many are awed by the fact that a digital asset that has grown multifold within a decade may grow further in the years to come as blockchain technology advances and there is more understanding of the inner workings of the cryptocurrency market.

All these factors beckon the question: Will cryptocurrencies like Bitcoin be a good idea for a retirement portfolio? If yes, how does Bitcoin fit in your current retirement portfolio?

The Crypto Boom

Did you know that there are only 21 million Bitcoins that can be mined?

As of February 24, 2021, 18.638 million bitcoin have been mined, which leaves just about 2.362 million yet to be introduced into circulation. One can now see the allure of this limited resource.

Bitcoin, in its short trading history, has already had a series of bubbles where price shot up to record levels, then crashed, and then boomed again. Bitcoin’s price jumped from $1 in April 2011 to a peak of $32 in June in the year, a gain of 3200% within three short months! That meteoric climb was followed by a sharp recession that brought Bitcoin’s price tumbling to a mere $2 in November 2011. The Great Crypto Boom of December 2017 is another such instance that haunts crypto investors. Bitcoin shot up in value from about $950 on January 1, 2017, to a high of $19,783.06 in mid-December of that year. It soon crashed thereafter. Bitcoin has a history of correcting up to 10% in just a day. 

Cryptocurrency has emerged as an asset with the potential to yield greater returns than what equities can offer. In cognizance, the number of cryptocurrency exchanges has also quadrupled in the last few years. There has been a sharp jump in the number of trades that took place amid the coronavirus pandemic, which further widened the market capitalization of cryptocurrencies to a whopping $2.3 trillion (as of May 2021).      

The ease of trading in cryptocurrencies has also made it a popular choice for investment. All one needs is a platform that facilitates cryptocurrency buying & selling. The bullish behavior towards Bitcoin prices also owes to recently seen heavy industrial buying as companies and institutional firms are seen investing in the crypto coin. There is higher trust in blockchain technology, too, which has grabbed the attention of investors across the board.

With the added benefit (or cause of concern) that there are no regulatory authorities or rules (such as minimum or maximum investment) governing cryptocurrency trading right now, one may choose to ride the cryptocurrency wave. However, the IRS has norms in place that make cryptocurrency taxable as property and demands taxpayers to include details of their transactions in their income tax returns.

Bitcoin in a Retirement Portfolio: Hedging Against Inflation?

We know that the time value of money decreases over the long term. This means that as time passes, the purchasing power of the dollar will go down as inflation makes goods and services more expensive. It is with this logic that investing is an advantage, especially from a retirement planning perspective. Investors aiming to save for retirement are often recommended to diversify their investments in stocks, bonds, real estate, etc., choosing assets to leverage their risk-reward potential to maximize earnings. The aim is to create a corpus large enough to be able to meet the inflated cost of living in the future.  

In this context, Bitcoin has gained the trust of investors as an effective hedge against inflation (given its tremendous growth potential) and to protect value in the uncertainty around the US dollar’s future purchasing power. It is a hope that when the investors near their retirement age, the price of Bitcoin would have risen, like stocks.

However, before investing in Bitcoin or any other cryptocurrency, investors must assess their risk profile and gauge their risk appetite. Consult your asset manager or financial advisor to chalk out what percentage of your retirement portfolio could be invested in Bitcoin. While it may provide investors with the potential for high returns, the risks are equally high.

Advantages of Adding Bitcoin to Your Retirement Portfolio

  • High returns: It is clear that Bitcoin has the potential to yield profits. Over very few years, the price of 1 bitcoin has skyrocketed, and made billionaires out of people who started investing small amounts in cryptocurrency, even as a joke! Refer to stories of the growth of the meme-led inception of Dogecoin or the copycat Shiba Inu coin. 
  • Decentralization: No agency, Government, or institution manages cryptocurrencies or the transaction. No such authority has been set up until now. There is no interference by any group or individual and it is free of politicization.
  • No limits to ownership: Currently, there is no limit to the number of crypto coins an investor can own. You can buy a fraction of a Bitcoin for as low as $1 and there is no cap on the maximum amount you can invest either.
  • Low transaction costs: There is no third party, bank, or governmental institution involved in cryptocurrency transactions. As a result, the transaction between two parties becomes easier and cheaper.
  • Reliable & safe: Transactions are encrypted with a public and a private key which makes them highly secure – cannot be counterfeited or double-spent. Additionally, investors need not divulge their personal information to buy or sell cryptocurrencies like the documentation at the bank. The transactions are anonymous.
  • Low inflation risk: Bitcoin is not affected by inflation like other currencies across the world are. The infinite blockchain system ensures that the cryptocurrency does not lose its value.
  • High transparency: According to Bitcoin.org, all Bitcoin transactions are public, traceable, and permanently stored in the Bitcoin network. Bitcoin addresses are the only information used to define where bitcoins are allocated and where they are sent.

Disadvantages of Adding Bitcoin to Your Retirement Portfolio

  • High volatility: Bitcoin and other cryptocurrencies have the highest volatility in prices among investment products. The prices of Bitcoin can fluctuate dramatically – it has even fallen up to 10% in 24 hours; Ethereum, the second-largest crypto coin, fell 18% in a day. The market for Bitcoin is highly unpredictable, and getting a good return in a choppy market can be challenging.
  • Subjective growth: The growth with cryptocurrencies is driven by a lot of speculation. There is no surety of making gains and no guarantee that the Bitcoin price will increase in the future. There is also no promise of growth like traditional investment options such as fixed income in the market.
  • Ambiguous laws: Deregulation and decentralization make it difficult to oversee transactions. Additionally, there is a smokescreen when it comes to taxation on cryptocurrencies in different countries. Lack of norms can lead to unforeseeable losses.
  • Flip-side of encryption: Risk of market manipulation and fraud (non-delivery of goods or services against payment of cryptocurrency has no easy redress), etc., are risks in crypto investing. According to research conducted by a blockchain analysis firm, nearly a fifth of all bitcoins in circulation is lost due to human errors with no chances to recover them by any means.   
  • Not widely accepted: The most contentious disadvantage is that not everyone accepts cryptocurrencies as a mode of payment. While a lot of companies are trying to make cryptocurrencies a mode of payment, it is currently just a drop in the ocean.
  • The security risk of being hacked: The biggest disadvantage with Bitcoin is that hackers may get their hands on your data and get access to your transactions.

Bitcoin in Young Adults’ Retirement Portfolio: High Risk, High Reward

Millennial investors are seen to be keen on dipping their toes in the Bitcoin wave. Based on their risk profile, young adults are more driven to get into Bitcoin and other riskier cryptocurrencies that have the potential for quick appreciation of capital. It might be a minuscule percentage, but many young tech-savvy adults are choosing to add Bitcoin to their portfolio.

Young adults with relatively lesser responsibilities can stomach large swings in Bitcoin. They have surplus funds to put in their retirement plan before more responsibilities come along. In general, young adults can afford to take more risks with their money.

Bitcoin is more of a modern, alternative investment idea, and investing in new ideas generally entices the younger population. Given its rate of return, more and more young adults are choosing to make Bitcoin a part of their retirement strategy. However, Bitcoin must not be made one’s sole retirement strategy. It is highly recommended that your portfolio is diversified into other asset classes too.

Bitcoin for Adults Nearing Retirement

An investor nearing retirement is highly likely to already have a sound retirement portfolio and ideally should not invest in high-risk asset classes.

Individuals aged 48-55 years may not be as tech-savvy and may require some assistance when it comes to investing in Bitcoin. They will need to understand the technology behind Bitcoin and be willing to invest in something that is not governed by a central body nor centralized.

Individuals opting to invest in Bitcoin near their retirement must ideally use their surplus savings to fund Bitcoin and must refrain from diluting assets in their retirement portfolio.

Investing in Bitcoin for Retirement Accounts

The Employee Retirement Income Security Act (ERISA) does not generally prohibit a 401(k) plan from providing access to a particular type of asset, including cryptocurrency. However, most plan sponsors, who act as fiduciaries, sit on the anvil, awaiting clarity about the investment space and evaluating its risk quotient for being a part of a retirement saving account.

Bitcoin IRAs are gaining traction. A Bitcoin IRA refers to a retirement account that includes Bitcoin as a holding. All you need is a custodian who can help you add Bitcoin to your IRA account. Investors may also skip finding a custodian and directly add Bitcoin to a self-directed IRA account (SDIRA). In a self-directed IRA account, investors can hold alternative investments like real estate and cryptocurrency. The norms for a self-directed IRA account are the same as any traditional IRA account; the only difference is that it puts the power in the investor’s hand. One may also opt for specialized firms that help add Bitcoin to IRA accounts.

How Does Bitcoin Fit in a Retirement Portfolio?

Bitcoin has indeed shown tremendous potential for increased value with time compared to other asset classes. However, it is also true that it is riskier than traditional investments. This is why it becomes important for one to understand where it fits in their retirement portfolio. Before an investor considers investing in Bitcoin for retirement, they must have a basic emergency fund in place. Make sure that all your basic financial requirements are met before delving into something as uncertain as cryptocurrencies.

One must also be mindful of being greedy when it comes to buying bitcoin. It might be tempting to invest ‘just a little bit more’ in Bitcoin if you have witnessed the growth potential of Bitcoin. The key is not to go overboard and put all your eggs in one basket. Your overall retirement portfolio must have a focused path.

A good approach to investing in Bitcoin, given the current volatility, is to consider investing an amount that you would be comfortable losing. If you aren’t comfortable losing $20,000; refrain from investing $20,000. The Bitcoin market is unpredictable and there is no guarantee of an assured return. One must brace for the worst outcome.

Understand your current retirement portfolio and lay out your expectations to know if you have room to experiment with a volatile asset class like Bitcoin.

The Bottom Line

If you are new to investing, you might want to study more about Bitcoin and cryptocurrency before you commit your hard-earned money to something you don’t know about. Virtual currencies like Bitcoin are a new asset class. Ensure that it sits well with your goals and risk appetite. The returns are promising, but the risk is equally high. For seasoned investors and those who believe in the future of cryptocurrency, Bitcoin can serve as a great opportunity. The opportunity can help you save tax dollars and can also help you invest in a stable future.

At the end of the day, there are no tricks to make more money with cryptocurrencies like Bitcoin. In considering the aforementioned pros and cons of Bitcoin, one must carefully decide if their life position and portfolio status are suitable to engage in cryptocurrency exchange.

For further guidance on how to create the most suitable retirement portfolio for your financial needs and goals, use Paladin Registry’s free match service and get matched to 1-3 vetted financial advisors who can meet your requirements and help you get started today.

To learn more about the author William Hayslett view his short bio.

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