Cryptocurrency has been making headlines lately, but the news hasn’t been good. In the last month, Coinbase announced it was laying off 18% of its workforce, Bitcoin’s price dropped 30%, Ethereum lost over 45% of its value, and the luna coin collapsed completely.
Losses of that magnitude are painful for anyone, but they can be devastating if you’re retired or getting close. Managing your portfolio’s risk profile is a key part of preparing to retire, so unstable investments aren’t always a good fit. The potential for big gains is appealing, but the massive volatility can just as easily work against you.
If you’re wondering about cryptocurrency and how to invest—or whether to invest at all—read on for our thoughts on how crypto fits into your retirement investment mix.
Two Schools of Thought on Cryptocurrency’s Future
In the context of the financial world, crypto is still in its infancy. Bitcoin was the first decentralized cryptocurrency to hit the market. It was introduced in 2008 and started trading a year later. Today, there are nearly 10,000 cryptocurrency types with more starting up every week.
Cryptocurrency’s rapid pace—both the introduction of new coins and the speed at which their values move—has created two opposing views on its future:
1. Get In On The Ground Floor
Backers usually cite a few key points when discussing cryptocurrency’s bright future:
- Growth potential - While values can drop, established coins like Bitcoin and Ethereum have shown massive growth over long periods of time. Crypto proponents believe that, given the finite nature of any specific cryptocurrency, value will continue to increase over the long haul.
- Decentralization - Since cryptocurrencies depend on blockchain technology, there’s no central authority that controls trading. Every transaction happens on a peer-to-peer basis, and the records are publicly shared by every participant. This creates a fully transparent audit trail for anyone who cares to review it.
- Flexibility - Because they’re decentralized, anyone can use cryptocurrencies anywhere. It doesn’t depend on governments, regulatory agencies, banks, or physical currency.
2. Beware of The Risks
On the other hand, many of crypto’s theoretical selling points are its downfall in reality. Coins’ values can rise and fall dramatically, leading to the potential for huge losses. Worse, crypto markets are more susceptible to manipulation than traditional assets. With the benefit of anonymity, people can induce value drops and spook regular investors, then buy up coins at a profit.
Additionally, without centralization and regulation, investors lack any recourse when bad actors take advantage of the system. Most investors who aren’t tech-savvy use third-party companies to hold their coins, much like a bank holds your cash. However, there’s no FDIC insurance or regulation of these services. If someone hacks a crypto exchange or holding service, you could lose all of your cryptocurrency, and there’s nothing you can do to recover it.
While cryptocurrency has the potential for rapid growth, it can just as easily lead to quick losses, and your assets may not even be secure to begin with.
Our Take: Crypto is Still an ‘Alternative’ Asset Class
During a recent appearance on The Art of Feminine Business podcast with Julie Foucht, Wealth Legacy Institute founder Kim Curtis was asked about cryptocurrency. Her answer was essentially “Wait, it’s too soon to jump in.”
She went on to explain that Crypto is more than just a currency. It’s a technology movement whose core focus is decentralization. Even within the industry, cryptocurrencies rely on different technological implementations whose varying details and rules can have a huge impact on stability and security for end-users. Without authorities like banks managing ownership of your assets or governing bodies regulating the industry, it’s a bit like the Wild West.
Volatility can be profitable for early adopters and insiders, but it stands in stark contrast to our principles of wise long-term wealth management. Planning for retirement isn’t a race to find a massive return as quickly as possible. It’s a decades-long process of balancing risk and reward to methodically build a secure future.
With that in mind, we consider cryptocurrency an alternative asset class. We generally recommend that clients have 5% or less of their wealth in alternative assets, and that includes crypto. As with most things, there’s a bit of wiggle room there. But if alternative assets hit or exceed 10% of your net worth, it would become a potential cause of concern for us. At that point, you’d want to convert some of your crypto into more traditional assets—stocks, real estate, precious metals, etc.—to manage your risk level.
A Long-Term Plan Is The Best Plan
It’s easy to see why emerging investment trends like cryptocurrency are tempting. There’s a lot of potential upside, the technology is interesting, and people love the idea of getting in on the ground floor.
However, you can’t build a secure nest by gambling on shiny new technology. Keeping a big-picture view when planning for retirement is critical to securing your future. You should work with a financial advisor to build a long-term financial plan with a variety of considerations in mind:
- Markets will shift over time and your plan should be strong enough to withstand change
- Maintaining a diversified retirement investment mix helps balance risk
- Use tax strategy to optimize how you allocate and withdraw funds
- Utilize Social Security and Medicare to bolster your income and minimize your out-of-pocket medical expenses
- Prepare for long-term health care needs that insurance won’t cover
- Save your money in various types of retirement funds like 401(k)s, pensions, and IRAs
Most importantly, keep your personal financial and lifestyle goals in mind. Everyone has different visions for the future, but with a solid long-term plan, you can achieve a secure and fulfilling retirement that fits YOU.
Does your investment portfolio match your long-term financial plans? Download our FREE 2022 Essential Retirement Guide to make sure you're on track for a secure and comfortable future.
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