Is cryptocurrency your path to retirement?
One of the key principles of retirement saving is diversification. Diversifying with stocks, bonds, mutual funds, exchange traded funds (ETFs), and real estate can help your retirement portfolio weather the market's ups and downs. With Bitcoin, Ethereum, and other cryptocurrencies in the news, you may wonder if you should consider adding them to your portfolio.
Why diversify with cryptocurrency
Risk is inevitable in investing. Interest, inflation, the political climate, and other risks can impact every company and industry. You can't avoid risk entirely, but you can invest in a wide range of industries, companies, and asset classes. That way, if one of them declines due to a market event, your entire portfolio may not suffer.
Cryptocurrencies can be an option for diversifying your investments. But it can be tough to know how they fit into your overall investment strategy.
Financial advisors recommend diversifying with industries and asset classes that are inversely correlated. That means that when one tends to go up, the other tends to go down. For instance, in times of economic growth and consumer confidence, stocks prices tend to be high. On the other hand, investors tend to prefer treasury bonds in times of economic uncertainty. Balancing a retirement portfolio with a mixture of stocks and T-bonds helps diversify your portfolio in an effort to maintain growth whatever the market conditions are.
But cryptocurrencies are a relatively new asset class. According to Gemini, a platform for buying crypto, not enough time has passed to determine a correlation between cryptocurrencies and other types of investments.1 This uncertainty makes it tough for investors and financial advisors to determine how much cryptocurrency belongs in a balanced portfolio.
Can you count on crypto for retirement?
Another factor to consider when investing is the volatility of cryptocurrency. This problem arises because supply of crypto is limited, and there's no central bank to control that supply.2 The lack of supply creates extreme volatility making it possible to earn a significant amount of money in a short amount of time. But this same volatility also means you could lose a lot of money over the same period.
Cryptocurrency and other digital assets also carry higher risks than other investments like stocks, bonds, and mutual funds. This is because they're not protected by the Securities Investor Protection Corporation (SIPC) like these more traditional investments.
If your brokerage firm fails, SIPC insurance will cover up to $500,000 of your loss, including $250,000 of cash.3 Unfortunately, there is no such federally funded protection for crypto. This means you have no recourse if the crypto platform you use folds or you lose your crypto wallet.
Most employer-sponsored 401(k) plans offer a limited menu of investments to choose from and don't allow participants to invest in cryptocurrencies.
How to invest in cryptocurrency for retirement
Being able to invest in cryptocurrency in a 401(k) plan may be possible, but it's uncommon. Most employer-sponsored 401(k) plans only offer a limited menu of investments selected by a registered financial advisor. These investments are almost always publicly traded mutual funds and ETFs.4
If you want to invest in crypto within a tax-advantaged retirement account, you can use a self-directed IRA.5 Self-directed IRAs allow you to invest in a broader range of assets, including limited partnerships, real estate, precious metals, cryptocurrency, and other alternative investments.
To open a self-directed IRA, you need to work with an IRA custodian that handles this type of account and be aware of the potential downsides,5 including:
- Higher fees.
- Custodians aren't allowed to give financial advice or make investment recommendations.
- Complicated record keeping and tax reporting requirements.
- The potential for IRS penalties if you don't follow the rules.
For these reasons, self-directed IRAs are usually only appropriate for very experienced investors or those with deep knowledge of the types of investments they're holding in the account.
If you're considering investing some of your retirement savings in cryptocurrency, keep in mind the number one rule of investing: Never put all your eggs in one basket. Cryptocurrency can make up a small part of your retirement portfolio, but don't go all in. And be sure to discuss the potential risks with your Synovus financial advisor.
Important disclosure information
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
Diversification does not ensure against loss.
- Gemini, “Correlations Within The Context of Cryptocurrencies," updated June 22, 2021, accessed December 7, 2021. Back
- MacKenzie Sigalos, “Bitcoin's wild price moves stem from its design —you'll need strong nerves to trade it," CNBC, updated May 20, 2021, accessed December 7, 2021. Back
- SIPC, “What SIPC Protects," accessed December 7, 2021. Back
- Adam Bergman, “Why You Likely Can't Buy Cryptocurrency In Your 401(k) Plan," Forbes, published March 17, 2021, accessed December 7, 2021. Back
- Rachel Hartman, “A Guide to Self-Directed IRAs," U.S. News & World Report, published May 12, 2021, accessed December 7, 2021. Back
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