Does Cryptocurrency Belong in Your Retirement Portfolio?

Many Americans seem to think it does. About 10% of US adults with retirement accounts report holding some form of cryptocurrency, according to recent surveys. Interestingly, younger investors are even more engaged, with around 18% of millennials mentioning they include crypto in their retirement savings.

Crypto investors appear to be in a decent position lately. For instance, Bitcoin, the most prominent cryptocurrency, is trading at roughly $115,600, reflecting a staggering 99% increase over the past year.

Integrating crypto into a retirement portfolio has become simpler. Companies like Fidelity are now offering direct cryptocurrency investments for IRA accounts, while others, such as Charles Schwab, provide access to Crypto ETFs. Plus, an executive order signed last month by President Trump is paving the way for alternative assets, including crypto, in workplace retirement plans.

There’s a split among financial experts regarding whether holding crypto is a wise choice for retirement savings, but most echo concerns about its inherent risks.

“The average person aims for a secure retirement plan,” said Jerry Schlichter, a founding partner known for advocating for employees facing excessive fees in 401(k) plans. “When exploring newer areas, like cryptocurrency and private equity, risks become apparent for various reasons.”

Assessing Crypto Risks and Potential Returns

Concerns about crypto primarily stem from its volatile nature. While Bitcoin has shown somewhat more stability compared to many lesser-known digital coins, it remains significantly more volatile than the overall US stock market. In fact, Bitcoin’s volatility has been about five times that of the broader market. Additionally, it’s important to note that Bitcoin experienced two drastic downturns in recent years, with a 74% drop in 2018 and a 64% decline in 2022.

Despite this, Bitcoin has generally outperformed stocks, bonds, and gold over the last eight years.

It’s crucial to remember that past performance does not predict future results—a principle that applies universally across investments. This uncertainty is often a sticking point for financial advisors when discussing cryptocurrency.

“Traditional retirement guidelines are grounded in years of historical data,” said Melissa Caro, a certified financial planner. “We lack sufficient history to fully grasp how cryptocurrencies will age.”

Investing in Crypto Responsibly

If you view your retirement account primarily as a safeguard for your assets, as Schlichter does, you might want to rethink crypto’s place within an IRA or 401(k).

Yet, a growing number of finance professionals are warming to the idea, provided certain precautions are taken. “Trustee responsibilities still apply, but many smart investors believe Bitcoin offers an attractive risk-reward ratio currently,” notes Joshua Brooks, a founder at Exponential Advisor.

If you’re considering adding crypto to your retirement mix, here are some responsible ways to approach it:

Know Your Risk Tolerance

“Crypto can be a fantastic opportunity based on your risk tolerance,” said Thomas Racca from Navy Federal Credit Union. The more comfortable you are with potential losses, the more risk you can handle. This might mean being okay with riding out fluctuations without panicking and selling off investments.

Younger investors, for instance, often have the time to weather downturns. If you haven’t drawn from your portfolio in a year, a 20% dip may not be all that concerning. However, if retirement is on the horizon, such dips could be more daunting.

Considering the volatility of cryptocurrency, investing in it is generally suitable for those with a strong appetite for risk, and those who are truly informed, Racca suggests.

Conduct Your Research

Financial advisors need to familiarize themselves with digital assets before making or recommending any crypto investments. “As with any investment, having a solid understanding derived from your own research is essential,” Brooks explains. Whether you lean towards Bitcoin due to its potential as an alternative currency or favor Ether for its smart contract capabilities, you must have a long-term approach that you can review regularly. Otherwise, you might end up chasing the market without a plan.

Don’t Overinvest

Even if you’re bullish on a cryptocurrency’s long-term prospects, its relatively short history calls for caution. “We simply don’t know enough,” Karo stresses. “You might find yourself overly cautious, but this is about your retirement.”

Most financial planners recommend limiting exposure to high-risk assets like crypto, ensuring that a significant downturn won’t jeopardize your overall retirement strategy. Brooks typically advises allocating no more than 5% to 15% of your portfolio to such investments, dependent on factors like risk tolerance and time horizon.