If you are planning for retirement, it makes sense to look as widely as possible for investment opportunities. For your retirement, you will want investments that are as reliable as possible – those that you can be (almost) sure will provide you with a healthy profit over the course of a few decades.
However, it’s common for investors who are still a few decades away from retirement to use higher risk investments to maximize their gains in the short term.
In the majority of cases, these shorter-term investments will be composed of stock, shares, and index-linked funds. But many investors are also looking at Bitcoin as a way of maximizing their return, encouraged by headlines about the huge gains that have been made in recent years.
This has inevitably led to the question with which we started this article – is it possible to retire on Bitcoin alone? In this article, we’ll look at both sides of the argument.
First, let’s get the obvious point out of the way. For most experienced investors, the idea of retiring on Bitcoin will seem inherently absurd, because it is simply too volatile.
Even though Bitcoin has been the least volatile of all cryptocurrencies over the past decade, weekly movements of more than 20% in the price of the asset are fairly regular occurrences.
At first glance, this would appear to make Bitcoin a terrible candidate for a retirement investment. You really don’t want your investment portfolio to fall in value by 20% the week before you retire, because this could potentially wipe hundreds of thousands of dollars from your retirement.
This is one of the reasons why it’s highly unlikely that your employer-sponsored retirement plan allows you to invest in Bitcoin. Because your employer is a fiduciary, and has the obligation to make appropriate investment decisions, they are likely to deem Bitcoin simply too volatile to form a safe retirement investment.
After all, plan participants can sue their employer if they make inappropriate investment decisions.
That said, there are ways of investing in Bitcoin for retirement. The most direct is to use a cryptocurrency exchange to build up a portfolio of Bitcoin, and hope that this continues to rise in value right up to the point where you retire.
A slightly less risky approach is to open a self-directed IRA, in which you decide which investments contribute toward your retirement, and buy Bitcoin as part of this.
Bitcoin Volatility vs. Growth
So there are ways of investing in Bitcoin for retirement, but that leaves the most important question – should you do that?
Well, here’s the short answer. Retiring on Bitcoin alone is a very bad idea, because your investments can drop in value so suddenly and without warning. Investing in Bitcoin alone is like investing in just one stock type – that is, not a well diversified portfolio.
That might be fine if you have decades left before retirement to recoup your losses, but if you are retiring in the next few years it could leave you short during a time when you should be financially secure.
The standard advice for most people looking to invest for their retirement is to put money into funds that track a broad range of stock prices.
The S&P 500 index is often used as the canonical example of this, because it has by far the largest market capitalization of all such broad-based funds.
Compare the price of Bitcoin to the S&P 500 index, and you’ll see why the latter is generally preferred as a retirement instrument.
Bitcoin has fluctuated wildly during the decade or so it has been a mainstream investment, and we have no long-term data to indicate its long-term stability.
In contrast, there’s a huge amount of data about the historical performance of the stock market – and at no point in the S&P 500 index’s history, would you have lost money on a 20-year investment.
Retiring on Bitcoin
All of the above can be summed up neatly – it’s a bad idea to rely on Bitcoin as your sole source of income during retirement.
On the other hand, there is nothing wrong with holding Bitcoin as part of a retirement strategy, especially if you are decades away from retirement.
This may sound like a contradictory position, but it’s not. The question here isn’t, “Should you invest in Bitcoin?” The question is, “Should you invest retirement money in Bitcoin?”
If you have a high risk tolerance, Bitcoin may very well make sense as an investment. It just doesn’t make sense as a core retirement investment.
Of course, in the real world things are not so simple. For most investors, the investments they make over their lifetime will eventually contribute to their retirement pot.
In practice, this means that most investment portfolios start out with high-risk, high-gain strategies, and then become less risky as an investor approaches retirement.
There is no reason why Bitcoin cannot form a part of this. If you can make short-term gains by investing in Bitcoin, you should absolutely do so.
You can even use your profits to contribute to a retirement account. Just don’t enter retirement with huge amounts of money invested in Bitcoin, because it’s possible that your investment funds could fluctuate wildly in the course of a week (or even a day).
The Bottom Line
If you believe in the future of the currency and you can stomach the ups and downs, Bitcoin could help you build serious wealth. Just keep in mind that the best retirement investments are those that allow you to reliably predict how much money you will have in retirement.
For this reason, you should tread cautiously. Limit your Bitcoin stake to a small proportion of your portfolio, and keep your retirement funds in more predictable investments. And if you make some money, keep it safe until you can use it in retirement.