Is cryptocurrency a good investment for retirement? Can investors trade cryptocurrency in the short-term? Or should they buy and hold it? What amount of money should you allocate to Bitcoin and Ethereum?
Many Americans are wondering when, if ever, cryptocurrencies should be included in retirement savings plans. It all depends. It is important to consider many factors when planning for retirement, such as how much you have saved, your life expectancy, income requirements, and your tolerance for risk.
A little risk is normal when building a retirement portfolio, especially if the time horizon spans decades. In a Barron’s Live event on Aug. 11, MarketWatch reporters Alessandra Malito and Brett Arends spoke about if, when, and how to include cryptocurrencies in retirement plans, and what to expect in the future.
To watch the full episode of this Barron’s Live session, click here. There were many questions about cryptocurrency from the audience, including these. Here are some comments from Bitcoin experts.
How much of your retirement savings should you allocate to cryptocurrency?
Although cryptocurrencies should not be included in retirement portfolios depends on individual goals, time horizons and risk tolerance, it can help diversify investments. Alternative options include cryptocurrencies as a small portion of a portfolio. A percentage below 1% is considered ‘too little to matter much’, and above 5% significantly increases risk. Matt Hougan is chief investment officer at Bitwise Asset Management. “But each individual should make their own decision.
One advisor explained alternatives in retirement portfolios as ‘ the icing on the cake, not the cake itself.’
Other investors are also interested in investing in cryptocurrency in retirement portfolios. Chris Kline, chief operating officer of Bitcoin IRA (a platform that allows investors to invest in digital assets), said that some client portfolios contain 5% to 25% dedicated to cryptocurrencies. These investors love the tax benefits of investing in cryptocurrency in an individual retirement account.
Here’s more information on the pros and cons of investing in cryptocurrencies through a self-directed IRA.
Are there compelling reasons to save for retirement? What are the compelling reasons to not?
Hougan stated that there are two main reasons to invest in cryptocurrency for retirement. It has historically high returns over the past year, three, five, and ten years. However, it is not correlated with traditional stocks or bonds. Hougan stated that adding noncorrelated assets could help to improve risk-adjusted return.
Hougan said that it’s also a “once in a lifetime disruptive technology that will make a huge impact on the world.”
In retirement accounts, there are potential tax benefits to investing in cryptocurrency. Capital-gains rates are applicable to these investments. If using a Roth IRA, investors pay taxes on their contributions up front and can then benefit from tax-free withdrawals at distribution, assuming they follow the rules accordingly.
There are other reasons to not include it in your retirement portfolio, so consider personal circumstances. Hougan stated that the biggest risk when investing in cryptocurrency is behavioral risk. An investment might be performing well, reaching a peak in one month. However, it could drop 50% the next month and cause panic among investors who want to sell. “You need to have a long-term horizon in order to keep an asset stable through volatility.
While we know how much of a retirement fund should be allocated for cryptocurrencies, what proportion of an individual’s net wealth should this asset be? How would you divide that among Bitcoin, Ethereum, and other alternative coins.
It is a good idea to invest a small portion of your portfolio in alternative investments like cryptocurrency. However, when looking at net wealth, it is important to concentrate on liquid assets. While net worth may include the home’s value, it is important to only allocate the available funds to these investments.
Hougan stated that humility is the best approach to allocating resources. Technology changes quickly. In just 30 years, Americans went from not having internet at home to being connected on their smartphones.
Hougan stated that it is difficult to predict how technology will evolve, which applications will matter, and where to invest. It might be best to keep your investments in cryptocurrency spread as broad and diverse as possible. If you feel strongly about a specific type of crypto, you can then either underweight or overweight it.
Is the government going to regulate cryptocurrency?
It is hard to tell when or how the U.S. government will take a closer look at regulating cryptocurrencies, but it is inevitable, Hougan said. He said that this could be a positive thing for the asset, because it will make it more accessible to all investors. He said that while regulations are being tightened, there are clear rules and safe harbors that allow for the ecosystem to flourish.
Do you prefer to trade or keep cryptocurrency?
Hougan stated that trading any asset is hard and that cryptocurrency is volatile is a difficult one. “So, if it’s binary between trading or holding, then you should keep it.
However, it is unlikely that someone will keep an asset like cryptocurrencies for the long-term without making adjustments to their portfolio or allocation. These should be checked at regular intervals, and rebalanced if necessary. Portfolio allocations move naturally with the price fluctuations of stocks or bonds. Without rebalancing, it can become off-track towards specific goals.
Hougan stated that “Crypto has become an institution asset.” Treat it as such.
Kline stated that there are investors who prefer the “set-it-and forget-it” approach. Kline stated that trading can be done with any commodity, but it is not something that we often see on our platform.
How can you determine when to exit these types of investments.
Hougan recommends having a core thesis when investing in this asset type. This is how you expect it to react in the market. Then, you can adjust your investment stance as more information becomes available. Sometimes bad news can strike, and the investment may plummet for a few hours, but it recovered quickly. What happened to your other assets during this time? He said, “I would not say to react to the immediate,” he added.
What are your thoughts on the future of cryptocurrency?
Hougan stated that crypto would be a common allocation in many portfolios over the next five-years. It will become more mainstreamed and accepted by the mainstream, and it will play an important role in how money moves around the world.
Although there have been many failed attempts within this market, it has seen significant growth over the past decade. Wall Street banks and politicians are now debating its future. He stated that the crypto market today is different from the crypto market in the past.