Cryptocurrency and Your Retirement Portfolio

Digital currency is a fundamentally new asset class - should you include it in your retirement portfolio? Craig Cecilio provides some pros and cons to consider.
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By Craig Cecilio

It’s no secret that investors are always in search of opportunities that deliver high ROI, likely through options such as venture capital, private equity funds, real-estate investment trusts and, increasingly, cryptocurrency.

Craig Cecilio

Craig Cecilio

Thinking of adding some diversity to your retirement portfolio? Cryptocurrency may be your answer. This alternative investment class holds much appeal. New and seasoned investors alike often ask: Is buying crypto a good idea for long-term investing?

Cryptocurrency, briefly defined

Cryptocurrency has come into the broader market as a “hot” asset class. Price swings in Bitcoin have lured millennials into these investments, and the IRS has even approved cryptocurrency IRAs.

But what exactly is cryptocurrency? It is a digital currency secured by cryptography, which makes it almost impossible to double-spend or counterfeit. Its value is determined by a complex web of market supply and demand, and since it isn’t backed by a single central authority, it isn’t affected by changes in government interest rates, inflation, and so on. In other words, cryptocurrency is an asset class with the potential to democratize access to wealth – currency by the people, for the people.

Of course, in practice, investing in cryptocurrency – whether for retirement or otherwise – is far more complicated than that. As with any investment, it’s essential to look past the bells and whistles of potential returns and clearly evaluate the risks and benefits.

Does crypto make sense for my retirement portfolio?

As with many alternative asset classes, cryptocurrency has many benefits, whether you use it at an individual or business level. Some key benefits include:

Lower transaction costs. Cryptocurrencies aim to make it easier to transfer funds directly between two parties, without the need for a third party like a bank or credit card company. This could lower fees and costs of transactions, making instant transfers much cheaper than anything currently being offered by banks.

Reliability and safety. A payment made with cryptocurrency cannot be reversed after the fact and cannot be used for fraud or lead to identity theft – a tremendous perk.

Crypto can be more stable. Adding cryptocurrency to a retirement portfolio can circumvent the issue of short-term price volatility. Because the returns are not correlated to any specific industry, investing in cryptocurrency can reduce unsystematic risk.

Upside potential. While past returns cannot be a predictor for the future, Bitcoin has led to many overnight millionaires in the past few years. While we would not encourage hasty and irrational investing, holding cryptocurrency could lead to alpha returns in your portfolio.

Why crypto might not be the right move

You must know yourself as an investor before deciding which asset classes should be in your portfolio. As tempting as it can be, there are also several reasons cryptocurrency may not make sense for your retirement plans:

Growth is subjective. When you buy shares of a company or invest in real estate, you know that the value of that asset can increase or decrease for various reasons. If a company you choose to invest in makes a bad financial decision or is in a declining industry, you’ll know why the stock is losing value. The same cannot be said for historical cryptocurrency returns, which have risen and fallen rapidly based entirely on speculation.

It is not universally accepted. There might be a time where cryptocurrency is synonymous with fiat currency, but our economy is not at that point yet.

It is not a lottery ticket. Under no circumstances should you go “all in” on any kind of investment. Your portfolio should be constructed with long-term goals and growth in mind, and as of yet, any kind of long-term trend in cryptocurrency remains to be seen.

The takeaway

Digital currency is a fundamentally new asset class and is rightfully being seriously (and carefully) considered by investors. Cryptocurrency can be a valuable investment if it fits within the overall goals and risk profile of your complete financial portfolio. Since cryptocurrency is a promising asset class with enticing upside potential, it’s worth considering as a retirement plan alternative for a diversified portfolio. However, its growth and returns cannot be studied in a vacuum, and potential investors need to ask themselves what they are hoping to accomplish by investing in cryptocurrency – and if their portfolios can withstand the risks.

About the author: Craig Cecilio

Craig Cecilio is founder & CEO of DiversyFund, a financial technology company providing an alternative investing platform accessible to all. DiversyFund works with the everyday investor to educate them on making the best investment decisions for their portfolio and investment goals.