Dubai: Cryptocurrencies have emerged as one of the most popular investments currently, maybe even more so than the meme stocks that broke the internet earlier last year.
Once you retire, you'll most likely need income outside of your primary retirement fund to keep up with your living expenses.
That's where your ‘secondary savings’ or investments come in – which needn’t be a lump sum amount but rather a recurring income dedicated to be spent on routine costs.
However, while you may want to add cryptocurrencies like Bitcoin, Ether or any other digital asset to your portfolio, veteran investors warn that you shouldn't do so at the expense of other investments.
Buy cryptocurrencies to fund retirement goals?
Investing in cryptocurrencies for retirement may enhance your investment returns as well as provide broader diversification, although it also introduces substantially more risk to your retirement portfolio.
A key argument for adding crypto to retirement savings is the diversification benefit of an asset class largely uncorrelated to traditional assets.
Cryptocurrencies are also touted by enthusiasts as an emerging asset class that maximises returns relative to the risk investors are taking.
The high liquidity associated with cryptocurrencies make it an investment avenue if you're seeking short-term profit. Digital currencies can be a long-term investment due to their high market demand.
The primary factor that makes cryptocurrencies like Bitcoin a hedge against inflation is its limited supply of coins. When the world's biggest cryptocurrency was created, a hard-cap was embedded into Bitcoin's source code that limited circulation to 21 million bitcoins.
Although technically even Bitcoin experiences inflation as more of it is mined (as does gold), because the amount of new bitcoin is automatically reduced by 50 percent every four years, Bitcoin's inflation rate will also decrease.
Risks to buying crypto for retirement purposes
Traditional retirement accounts typically don't allow you to invest in crypto assets. If you're thinking about it, you'll likely need to invest in crypto outside of your traditional retirement fund. But it's important to understand the risks of doing so.
Due to their extreme volatility, it's possible to earn a good amount of money in the short term by making well-timed investments in cryptocurrencies.
In the medium and long term, however, it cannot be determined. Cryptocurrencies are still relatively new, and it's still unclear how they'll function in the long term as regulators around the world still determine how to handle them while the markets continue to fluctuate.
However, long-term prospects of cryptocurrencies are still bright, given that financial institutions have already begun to incorporate block chain technology – the technology that powers crypto assets – and even individual digital currencies into their business models.
Moreover, while block chains and cryptocurrencies are often decentralised (control diversified to several authorities rather than a single one), the business entities issuing them may not be.
This means that in the case of some cryptocurrency projects, crypto enthusiasts are still relying on a trusted entity to act in the best interests of the project.
More reliable retirement savings options
Whether you're a few years from retirement or you have decades of work ahead of you, there are plenty of financial instruments you can choose to invest in that can provide a more reliable return than cryptocurrency.
As you contemplate changes to your investment portfolio, it's important that you diversify it in such a way that you don't have too much money in one asset.
For example, buying individual stocks is a typical investment strategy, but going all in on one company can cause your retirement balance to be wiped out if that company's stock plummets.
Also, depending on how long you have until you retire, you may want to prioritise certain investments over others. People in their 20s and 30s can afford to invest in riskier assets.
This is because they won't be as impacted by short-term market volatility. But if you're retiring soon, you’d want to prioritise investments less likely to drop in value and put your retirement at risk.
Make sure it's a small portion of your total investment strategy, though. Again, while crypto does have a high potential for short-term gains, it also has a high risk of big losses.
Additionally, in the long run, uncertainty still lingers on its reliability as an investment vehicle. So due diligence in vital when long-term investing for retirement in order to gauge risks and rewards and create a strategy that works best for you.
Verdict: Can you count on just cryptocurrencies to fund your retirement?
No, and here's why. While the value of cryptocurrencies has been rising dramatically, it's also been a notably volatile investment. That's not particularly unique to Bitcoin, but rather, a characteristic of the entire crypto market.
Because cryptocurrencies are inherently risky, it definitely shouldn't be the only place where you invest your nest egg. Not only could can their value tank in the near term, but we don't know how changes within the crypto space might impact its future value.
With digital assets carrying much higher risks than other financial instruments like stocks, bonds and mutual funds, solely counting on cryptocurrencies to fund your retirement is not recommended. Instead you are often advised to buy them alongside other assets and diversify your risks in doing so.
However, while getting involved with the cryptocurrency markets can expose you to new types of risks, many believe that cryptocurrency may bring advantages over traditional financial infrastructure.
In the coming years, many expect users and businesses around the world to continue to develop and adopt block chain technologies, which could help to level out the uncertainty and bring about a more established, calm crypto market.
For now, what most crypto experts often endorse doing is to educate yourself on this risks and new developments in the space, while learning to manage your risks through diversification of investment assets. In doing so, you practice what is commonly referred to as ‘good digital hygiene’.