The popularity of cryptocurrencies has grown among the masses in recent years. It even has some people thinking that they’re a good investment for retirement. In fact, according to the 2022 Investopedia Financial Literacy Survey, about one-third of investors under the age of 55 plan to rely on cryptocurrency during retirement.

This might sound like a risky plan, considering the volatility of the crypto market, and it is.

Terra blockchain’s luna, a once-popular stablecoin cryptocurrency, was wiped out early in 2022, taking more than $17 billion in crypto value with it. The coin’s price fell from $116 to a fraction of a penny in a matter of days, making it among the most dramatic crypto crashes on record. That is, in part, because crypto is not legal tender backed by the U.S. government, and thus is not subject to Federal Deposit Insurance Corp. (FDIC) protection.

The U.S. Department of Labor has warned the retirement industry to exercise “extreme care” when investing in crypto, pointing out that plan fiduciaries have a legal obligation under the Employee Retirement Income Security Act (ERISA) to protect people’s retirement savings. But some people are more comfortable with risk than others, and the established players, like Fidelity Investments, are taking notice.

This year, Fidelity Investments, the largest retirement plan provider in the United States, became the first to add Bitcoin as an investment option in its 401(k) plans. Under their plan, investors will be able to allocate up to 20% of their retirement savings to Bitcoin. But individual fiduciaries may establish their own employee contribution limits and allocation maximums.

However, just because it’s possible to invest in an asset like crypto for retirement doesn’t necessarily make it a good idea.

Is Cryptocurrency a Good Long-Term Investment?

The modern age of cryptocurrencies began with the launch of Bitcoin in 2009. Since then, Bitcoin has seen a mean annual return of 93.8%, which is pretty impressive over the long haul, but that doesn’t mean there weren’t bumps in the road. In 2018, the return was -72.6%. And while early investors who have held on realized massive returns, not all coins have fared so well. With thousands of cryptocurrencies to choose from, investors have had mixed results, to say the least.

That said, crypto topped the list of best expected returns among those ages 18 to 55 in the 2022 Investopedia Financial Literacy Survey. Among millennials, 30% expect that crypto returns will top stocks, real estate, and mutual funds.

But time will tell if those expectations are founded in reality. For now, it’s too early to know if cryptocurrency will be a good long-term investment. For most investors under age 55, their retirement is more years away than any cryptocurrency is years old. When you add to that the fact that those same investors who expect big returns don’t fully understand where they plan to put their money, it can be a bit alarming.

In Investopedia’s survey, across age groups, more than 40% of respondents said cryptocurrency is too risky or too confusing. Among millennials, specifically, 44% say that cryptocurrency is too confusing or risky for their money. Meanwhile, 58% of baby boomers say that cryptocurrency is too confusing. Less than half of millennials stated that they could explain how cryptocurrencies work, while only 5% of baby boomers can explain cryptocurrencies, and only 3% understand non-fungible tokens (NFTs) well enough to share how they work with someone else.

So while it is clear that cryptocurrency can be a novel and sometimes trendy new asset class, it’s also extremely risky and volatile. You may want to think twice, and consult a financial planner, before leaning on crypto for your retirement planning.

What to Look For When Choosing Retirement Investments

As you’re building your retirement portfolio, it’s critical to consider several essential factors, such as:

• Expected growth rate: An important investment fundamental is the expected growth rate. Stock market and bond investors rely on various valuation models to predict growth. That’s trickier with cryptocurrencies.
• Risk and volatility: Both stock and bond markets have decades of historical data and risk measurement frameworks. Not only are cryptocurrencies riskier and more volatile than stocks or bonds, but measuring their risk is also more complex. The number of models available to measure cryptocurrency risk is limited.
• Cash flow: Many investments offer predictable dividends, bond coupon payments, and other forms of cash flow. Here, several cryptocurrencies provide an edge over more traditional investments thanks to staking and yield farming. It is possible, however, that these newer systems will no longer function the same way 10 to 20 years down the road when a person retires.

Of course, just because something is new and untested doesn’t necessarily mean it’s a bad investment. The final decision on where to put money is up to the investor, so they should weigh the pros and cons every time before making a decision.

How to Build a Core Retirement Strategy

What is the appropriate investment amount for an investor? It depends on various factors. First, calculate your financial needs for retirement. Then, determine the allocation of investments and contributions needed to get there.

Traditional investment strategies focused on a combination of stocks and bonds to reach this goal for the typical investor, often relying heavily on tax-advantaged 401(k) plans and individual retirement accounts (IRAs). In addition to crypto-specific and entirely self-directed traditional and Roth IRAs, some traditional brokerage firms are beginning to add cryptocurrency to traditional retirement accounts. So if you’re set that this is your path forward, consult a financial advisor before putting your money into such a risky asset.

Of all investments in anybody’s life, retirement accounts are arguably the most important. And if you go big on crypto—or if you only invest only in cryptocurrency for your retirement, and that asset class goes bust, as we have seen in recent crypto winters—you may be forced to reconsider your current or future plans with little notice.

Where Crypto Fits into An Investment Plan

Due to the risk, volatility, and difficulty predicting the future of cryptocurrency, many investors should avoid including crypto in their retirement investments altogether. If you decide to include cryptocurrencies, keeping them as a smaller portion of your overall portfolio may be wise.

Unless you’re a firm believer in cryptocurrency who wants to take advantage of the tax savings of a cryptocurrency IRA, you may be better off keeping cryptocurrency as a relatively small portion of your overall portfolio and out of your retirement.

Many investment experts suggest keeping the bulk of your retirement assets in the stock market, preferably in low-fee, diverse exchange-traded funds (ETFs). High-risk alternative investments are still fair game but reserved for a portion of your investments that are not critical to your livelihood in the future.

The Bottom Line

When building your cryptocurrency investment strategy, consider this scenario. If you invested $5,000 in cryptocurrency and it went up by 10×, you would have $50,000. That’s a great return. But if it went to zero, would it be enough to ruin your retirement plans? Probably not.

While the $5,000 example works for some individuals or households, your investment portfolio, risk tolerance, and financial goals are unique. By understanding your investments and how every asset that you own works, you can decide on the ideal allocation for your retirement portfolio and other investments. Cryptocurrency may fit in one or both of those investment strategies. But if you’re planning on relying on assets for retirement, invest with care.