It’s no secret that cryptocurrencies have gotten a bit of a reputation as a tool for quick money. With the wild price upswings, it’s not an unwarranted one. Yet CNBC recently examined how cryptocurrencies can be a viable asset for retirement planning as for day-to-day traders and risk-oriented investors.
Cryptocurrencies and portfolio theory
Over the last few years, traditional portfolio theory has gotten the most scrutiny perhaps since its inception. Many are questioning or outright doing away with the 60/40 model, primarily due to the unappealing landscape of the bond market. Cryptocurrencies are one of the nontraditional, so-called “alternative” asset classes that have recently emerged as an option for savers to diversify their retirement portfolios.
In this role, cryptocurrencies certainly occupy a spot for themselves, though they share some traits with other alternative investments.
Crypto’s role in a portfolio
Although they are a hedge, they are not generally perceived as a safe-haven one because of the price volatility and the freshness of the sector. There’s some research on the benefits of diversifying a standard investment portfolio with cryptocurrencies, even in already well-diversified portfolios.
It might also be fair to say that cryptocurrency upside potential outweighs that of most “save haven” investments. And, what many consider to be the most important factor, they are perhaps the easiest investment to get started with.
Right-sizing your allocation to cryptocurrencies in retirement savings
Zechariah Schaefer, founder of Ascent Personal Finance, believes cryptocurrency retirement investment should be approached based on individual risk tolerance, not unlike stocks. He also notes that crypto investors should do their research when it comes to security when investing in cryptocurrencies, as their wholly digital nature can present security risks for an unfamiliar investor.
In contrast to the view that crypto is there for big short-term moves, some financial planners recommend that retirement investors buy crypto depending on their time to retirement. Someone a few years from retirement might only want to make a minimal investment and then increase their exposure later if they so desire. On the other hand, Alex Mashinsky, co-founder and CEO of cryptocurrency lending company Celsius, says that younger investors would do well to consider a greater allocation to crypto for their retirement fund.
Other recommendations include making incremental investments over a longer period to lower volatility and risk, as well as not worrying too much about intraday losses and gains. Mashinsky used to recommend a 2% to 5% portfolio allocation to cryptocurrencies, but has upped it to between 5% and 15% as the market has grown and the industry established itself.
Economics professor Aleh Tsyvinski thinks optimal results come from every investment portfolio including at least 6% bitcoin.
Opinions: everybody’s got one. What’s more relevant is your personal financial plan, your time to retirement, your risk tolerance and of course your financial goals. These aren’t something a blanket statement can address in a meaningful way. They’re questions you have to answer for yourself, as a part of taking responsibility for your own financial future.
“Deep” diversification with bitcoin
There is also something to be said about bitcoin for retirement in particular.
Perhaps because it is often grouped with other cryptos and referred to as a high-risk investment, some seem to forget that bitcoin is one of the few truly decentralized assets, and one of the most independent ones.
Even a top company can collapse, leaving its shareholders with nothing. While sovereign countries aren’t usually prone to outright collapses, their bonds certainly are, as recent developments have shown.
Bitcoin can’t really be eliminated, and in a sense that makes it a sounder long-term investment than either stocks or bonds. The risk we hear about has to do with day-to-day price volatility and threats of clampdowns, but not with the actual long-term utility and stability of bitcoin. Although it’s only twelve years old, it seems like crypto in general and bitcoin in particular will be around for much, much longer.