Investing in Cryptocurrency for Retirement
Cryptocurrency is one of the newest forms of investment available, giving consumers a chance to put their money into digital currency. But crypto may not make sense as a retirement planning strategy. It’s a remarkably volatile market with high highs and low lows, and it is not as secure as other forms of investment since it typically isn’t regulated.
What Is Cryptocurrency?
Cryptocurrency has moved more and more to the forefront of investing in recent years as it has grown from a fringe idea to a more readily accepted part of finance.
According to Forbes, crypto at its core is a digital and encrypted medium of exchange. You essentially pay money to purchase a “coin” of cryptocurrency. This isn’t a physical object like a dollar bill. Instead, it exists digitally in an encrypted form.
More and more businesses are accepting crypto as a way to pay for goods and services, just like you would use money. But, due to the volatility of the market and the trend for certain currencies to quickly and dramatically increase in value, many more people view crypto as a form of investment.
In this way, crypto functions more like a stock option than money. The key difference is that, unlike the stock market, there isn’t a central or governing authority over cryptocurrencies. While the potential is there for big gains, this can also create a lot more risk.
How Does Cryptocurrency Work?
Cryptocurrency works almost like regular money and a share of stock rolled together. You can either spend crypto like cash at businesses that accept it, or you can hold onto your investment like any other asset hoping that it grows in value.
Investing in crypto can pay off in a big way. Bitcoin, the first and most popular cryptocurrency, has seen its value increase in the last five years from about $1,200 to over $40,000. Just like a stock option, you could have held onto your Bitcoin as it grew and then sold it at a profit.
But the crypto market has established itself as one with dramatic swings in both directions. Bitcoin’s value rose as high as $64,400 at one point in late 2021, before plummeting down to about $35,000 in January of 2022.
Where crypto differs from money or stock is the way that it is created and stored. Some cryptocurrencies like Bitcoin are created by “mining.” According to the U.S. News & World Report, mining refers to using computers to solve complex equations. Mining verifies existing crypto transactions while also resulting in the creation of more currency.
Cryptocurrency is also stored differently than money or a stock option since there is no governing authority. According to NBC Miami, crypto can be stored in an online wallet, which can be risky since it may be susceptible to hackers. It can also be stored offline and locally, like on a thumb drive.
Does Cryptocurrency Fit into a Retirement Portfolio?
While cryptocurrency is a major trend right now, and the potential is there for a massive payday, it may not make sense as part of a retirement plan.
Above all, cryptocurrency is characterized by its volatility. New currencies can rise into the stratosphere before disappearing into nothing in a matter of days. Even the oldest and most popular options, like Bitcoin, are still subject to major ebbs and flows.
Your retirement portfolio should be reliable and ensure financial security in your later years. So, long-term investments make much more sense in this case. According to CNBC, investing in cryptocurrency should be viewed as more of a short-term investment.
Another concern with including cryptocurrency as part of your retirement investment strategy is the inherent risk. Crypto is not backed by banks or the government. There is no central authority or overseeing figure. Hacking and stealing do happen.
These are risks that may seem acceptable in the short term given the money that can be made but offer more reasons that cryptocurrency may not make sense as a years or decades-long investment.
Pros and Cons of Investing in Cryptocurrency
As with any form of investment, there are both upsides and downsides to investing in cryptocurrency.
The most obvious upside is the ability to make a lot of money. The benefit of a volatile market is the chance of building a serious profit if you time your investment properly or identify a currency that is about to take off.
Some people may also be drawn to cryptocurrency because it serves as an alternative to dealing with the traditional banks that have a huge hand in typical American finances.
- Chance to make a lot of money quickly
- An easy alternative to traditional banking
- Lots of inherent risk
- No regulation or central authority
But there are very real downsides to investing in crypto as well. The flip side of the chance to make a lot of money is the inherent risk that comes with it. The tradeoff for having a market with the highest of highs is that it is also prone to the lowest of lows.
Your investment in crypto can lose its value just as quickly as it can double. And while the disconnection from traditional banking is appealing to some, it also means that the typical security and safety you would get from some sort of governing authority is absent from the world of cryptocurrency investing.
Common Types of Cryptocurrency
The first — and still most popular — form of cryptocurrency is Bitcoin. Founded in 2008, it kicked off the current crypto movement. As of April 2022, a single Bitcoin was worth about $40,000 in value.
- Binance Coin
- U.S. Dollar Coin
While Bitcoin still sits in its own realm above the rest of the market, there are a number of other popular cryptocurrencies as well. Ethereum is popular in part because it goes beyond just crypto, offering many potential different services and playing a role in the growing NFT industry.
Tether is another popular option which, like USD Coin, is tied to a traditional currency to avoid the dramatic swings in value that many other cryptocurrencies experience.
But despite the several big names that dominate the industry, there are practically limitless options when it comes to crypto, with literally tens of thousands of different currencies.
How to Invest in Cryptocurrency with Less Risk
Not all cryptocurrency investment options carry the same amount of risk. Some currencies are much more likely to be volatile than others.
In fact, there are some currencies with no risk of volatility at all. USD Coin, for example, is a type of cryptocurrency tied directly to the value of the U.S. dollar. There’s no mining and no dramatic swings in value. The currency will always match the value of the dollar.
You can also invest in the more volatile options out there but do so with less risk by making smaller investments and spreading those investments out among several of the most historically strong and stable cryptocurrencies. This gives you a chance to be involved in the industry and have a chance to benefit from its typical massive swings, but without putting a ton on the line.
According to CNN, another way to invest in cryptocurrency while keeping your risk low is to not buy crypto at all, but instead to invest in the companies that are. There are many publicly traded organizations that have big stakes in crypto. Investing in these companies can give you the chance to benefit from cryptocurrency’s growing popularity without being along for the up-and-down ride of owning any.
Frequently Asked Questions About Crypto
7 Cited Research Articles
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- Tretina, K. (2022, April 7). Top 10 Cryptocurrencies in April 2022. Retrieved from https://www.forbes.com/advisor/investing/cryptocurrency/top-10-cryptocurrencies/
- Prigeon, J. (2022, March 18). What Is Cryptocurrency and How Does it Work? Retrieved from https://www.nbcmiami.com/news/local/crypto-decoded-what-is-cryptocurrency-and-how-does-it-work/2716134/
- Rodeck, D. (2022, March 1). Cryptocurrency Taxes 2022: What You Need to Know. Retrieved from https://www.forbes.com/advisor/taxes/cryptocurrency-taxes/
- Ashford, K. (2022, January 25). What Is Cryptocurrency. Retrieved from https://www.forbes.com/advisor/investing/cryptocurrency/what-is-cryptocurrency/
- Duggan, W. (2022, January 25). Bitcoin Mining Definition. Retrieved from https://money.usnews.com/investing/term/bitcoin-mining
- La Monica, P. (2021, April 22). Here’s How to Buy Bitcoin Without All the Risk of Buying Bitcoin. Retrieved from https://www.cnn.com/2021/01/21/investing/bitcoin-stocks/index.html