Blockchain

Crypto Retirement Funds: 5 Things to Consider Before Investing

As cryptocurrency continues its emergence into the mainstream, people and institutions have found possibilities for it in a variety of applications. One such application is retirement funds.

Retirement funds have traditionally been perceived as predominantly low-risk, long-term investments that should only be withdrawn from after their holders’ have finished working. The idea of including cryptocurrency in retirement funds, then, may seem blasphemous to many. Blasphemous or not, though, cryptocurrency is now an option for retirement funds – an option that many are choosing.

Are you, also, thinking of including cryptocurrency in your retirement fund? If so, there are 5 things you need to consider first; this article will explore and illuminate each of them.

1. Cryptocurrency is Not “Low-Risk”

As mentioned earlier, retirement funds have usually been seen as “low-risk” accounts that should only grow in value over time, without substantial possibility of losing in the long-term. It is precisely for this reason that many will scoff upon hearing of the inclusion of cryptocurrency in retirement funds. Historically – and perhaps inherently – cryptocurrency is not a low-risk investment.

Risk-Return Tradeoff

Most investors are familiar with the concept of risk-return tradeoff. Although it may seem obvious, even to those hearing it for the first time, it is critical. The risk-return tradeoff is this: The amount of risk involved in an investment is often correlated with the amount of reward that can be generated from said investment. Therefore, low-risk investments might not lose much money, but they’re unlikely to lead to huge gains. Conversely, high-risk investments might lead to big losses, but they’re also more likely than low-risk investments to produce large returns.

We’ve made it abundantly clear by this point that cryptocurrency belongs to the latter class; crypto is a high-risk investment. With this in mind, the next logical question might be:

Does cryptocurrency belong in a retirement fund?

The answer to this question, as with most of the more complex questions in life, is “it depends.” Many people, especially those who hold pessimistic views of cryptocurrency in general, will want to totally avoid digital currency, never mind include it in their retirement portfolios. Others, especially younger and more risk-tolerant individuals, may be quite interested. In fact, risk tolerance is likely the biggest factor that will dictate whether or not cryptocurrency belongs in your retirement portfolio.

Risk Tolerance

Retirement funds have often been lumped into distinct classes according to their levels of risk. Generally, there are three classes: low-risk, moderate-risk, and high-risk. The logic of these classes is dictated by the risk-return tradeoff that we discussed earlier in this section. As you might surmise, low-risk retirement funds tend to generate modest returns without significant chances of losing value over time. High-risk funds may offer higher potential returns with added downsides. Moderate-risk funds, of course, reside in between low and high risk.

Crypto and Risk Tolerance

Logically speaking, people who would be interested in low-risk retirement funds, exclusively, would probably not want to include cryptocurrency in their retirement funds – except possibly as a small portion for diversification (which we’ll talk about more in the next thing to consider).

Individuals with moderate risk tolerance and an optimistic outlook on cryptocurrency may be interested in including crypto in their retirement fund. Similarly to those interested in low-risk funds, though, the percentage of cryptocurrency compared to the entire portfolio would likely be quite low.

Individuals with high risk tolerance would likely be the best candidates for including more significant portions of cryptocurrency in their retirement funds.

2. Cryptocurrency May Belong in Diversified Portfolios

While risk tolerance refers to an individual’s willingness to take on volatility in investments, diversification is a method by which risk can be managed. Investors diversify their portfolios – and/or retirement funds – by investing in a variety of assets and asset classes. The simplest way to understand diversification is to think of it as avoiding “putting all your eggs in one basket.”

Well-diversified portfolios handle risk well because while all investments may be subject to losses and gains, they may fluctuate at different rates and directions. By picking a broad range of assets across several classes that are likely to perform well over a long period, you may protect yourself against both short and long term risk.

In the above section, when we discussed risk tolerance, we mentioned that individuals who are able to tolerate some substantial risk might find a place for cryptocurrency in their retirement funds. By this we meant that cryptocurrency can fit well into a diversified portfolio. A well-diversified portfolio might contain several low-risk investments, several moderate-risk investments, and maybe even some high-risk investments. Let’s say, for a moment, that you had a portfolio like this and included some crypto.

In a well-diversified portfolio with plenty of stable, low-risk investments, even a huge and catastrophic crypto crash may not have a disastrous impact on your portfolio’s total holdings. On the other hand, if cryptocurrency were to “go to the moon,” as so many hope, the gains would be quite welcomed. This is the power of diversification.

3. Your Crypto Holdings Can Be Diversified, Too

Yes, cryptocurrency is considered a highly risky asset class across the board. Within cryptocurrency, however, there are lower risk digital currencies and higher risk ones, too – relatively speaking, of course. With this in mind, it’s quite possible to not only include cryptocurrency in your diversified portfolio, but to diversify your cryptocurrency holdings within that portfolio, too.

The crypto community has seen the risk-return tradeoff in action countless times over the last few years. Indeed, some of the biggest gains that have been seen have come from the absolute riskiest investments. On the other end of the spectrum, more established cryptocurrencies – like Bitcoin and Ethereum – have certainly seen meteoric rises, but are likely to be much more stable than other “altcoins.” Bitcoin and Ethereum are still more than likely to see drastic up and downswings, but since they are now well-established, they are significantly less likely to plummet to zero.

A well-diversified cryptocurrency portfolio inside of a well-diversified retirement fund would hold some amounts of coins like Bitcoin and Ethereum and some amounts of other, smaller coins that you’ve researched and see good potential in. Betting on a variety of smaller coins often turns out to be an excellent “gamble” if even one of them takes off.

Say, for example, that you put $1,000 into ten coins that are all extremely risky but have potential. If just one of them takes off and gives you 2,000% returns (which is absolutely not impossible in crypto!), you’ll make big profits even if the other nine end up completely worthless.

4. Where Should You Keep Your Crypto Retirement Holdings?

If you do decide to go ahead and invest in cryptocurrency as part of your retirement fund, you’ll have to decide where to put that cryptocurrency, exactly. In this case, you’d have a number of different options.

Create Your Own “Pseudo-Retirement Fund”

For maximum freedom and minimum structure, you could simply buy and hold cryptocurrency and call it your retirement fund – or part of it. In this case, you’d have your choice of all the different exchanges from which to buy the cryptocurrencies you’re interested in.

After purchasing, it’d be highly recommended to get your crypto holdings off of the exchange and into a more secure wallet – possibly a paper or hardware wallet, especially if you don’t plan on selling, transferring, or utilizing that crypto in any way for the foreseeable future.

If you were to go this route, of creating your own “pseudo-retirement fund,” diversification could be achieved by making your crypto holdings one portion of your entire portfolio. For the rest of your portfolio, the assets you invest in would be entirely up to you. Of course, nothing would stop you from getting a more traditional retirement fund to go along with your crypto holdings.

Look into Dedicated Crypto Retirement Funds

Yes, there are actually dedicated crypto retirement funds! One of the more well-known is Bitcoin IRA, which calls itself the “world’s first and most trusted Bitcoin IRA platform.”

One of the key benefits of dedicated crypto retirement funds is that they act like traditional retirement funds. For example, Bitcoin IRA advertises that it is available for “IRA Rollovers, Roth, SEP, Employer Plan 401(k)s, and new or existing traditional IRAs.”

Find an Established Retirement Fund that Supports Crypto

Cryptocurrency is becoming so widely adopted that it is even finding its way into traditional establishments’ retirement funds. For example, Fidelity made headlines earlier this year when it announced that it would offer cryptocurrencies in its retirement accounts. According to the linked article, Fidelity retirement plans would allow up to 20% of individual funds to be allocated to cryptocurrencies like Bitcoin.

5. Do your own research!

Of course, it is always the case that individuals should do their own research into whatever they’re investing in. Retirement funds, however, may seem especially important to many and may require extra care, especially if large amounts of capital are involved.

This advice – to do your own research – applies to things like stocks and bonds, too, but it is absolutely imperative in cryptocurrency. Before you put any money into crypto, make sure you understand the technology, understand its goals, and understand the risks.

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