Bitcoin is one of the latest investing trends, and some people may wonder if it’s an excellent strategy to incorporate some digital assets into their retirement plans. The choice to invest in Bitcoin and other cryptocurrencies have been non-existent in 401(k) plans. Bitcoin was not designed nor intended to become an investment asset, but it has transformed into one due to influences outside the control of the community of developers.
If you’re considering investing in crypto for your retirement, it’s essential to understand the gamble associated with this option and how its volatile nature can impact your portfolio. Here are a few things you should know about investing in crypto and why many experts say to stay away from it.
Bitcoin Isn’t Backed
The price of Bitcoin has skyrocketed in recent years after starting from nothing, which gave the impression that it may have an underlying value to the cryptocurrency. But it’s vital to understand that Bitcoin is not backed by anything, unlike stocks or bonds. Stock investments are much safer because of the assets and cash flow of that underlying business.
But that does not apply to Bitcoin because there’s nothing behind it, no assets or cash flow that protect its value.
Bitcoin is Unpredictable and Risky
The lack of fundamental value makes Bitcoin highly unpredictable and risky. Moreover, the price is driven by sentiment alone because it has no inherent value to the cryptocurrency. Investors have no rational or fundamental way to determine the value of Bitcoin.
Successful Investors Are Skeptical
On top of these fundamental issues, Bitcoin and other cryptocurrencies are not even drawing attention from notable investors, including many of the most widely respected.
Although many businesses are implementing Bitcoin into their 401(k) accounts, that doesn’t mean it is the right choice for you. It is wise to talk to a financial advisor familiar with cryptocurrency before deciding.
An expert can help you place your Bitcoin into your portfolio as a strategic investment plan. Or instead, recommend sticking with a time-tested means of generating wealth – buying and holding a well-diversified portfolio of high-quality investments and then adding to your portfolio over time.
Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency.
Purchasing cryptocurrencies comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing.
Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.