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Can Crypto Be Your Path to Retirement?

Published, 1 October, 2020

The old saying “Don’t put all your eggs in one basket” didn’t stem from retirement planning, but it’s still a good rule of thumb. Just about any financial planner or advisor will tell you that the more diverse your retirement portfolio, the less vulnerable it is to market ups and downs. While some people diversify with stocks and bonds, don’t forget that cryptocurrencies can play a key role in your retirement strategy.

Can You Count on Cryptocurrency for Retirement?

Mainstream investors and consumers have been inundated with stories of overnight crypto millionaires and volatile prices. But cryptocurrency might not be as unpredictable as you think. In fact, when oil futures crashed in the Spring of 2020–some going negative for the first time ever–bitcoin prices remained relatively stable.

Every investment has its ups and downs, and some cryptocurrencies are more volatile than others. But smartly diversifying your retirement portfolio can help support your financial future.

Why Diversify with Crypto?

The goal of diversifying a retirement portfolio is to spread your risk over a wide variety of investments that don’t tend to move in the same direction at the same time. That way, as one investment dips, another one might rise, thus evening out potential losses and providing more predictable, stable returns.

According to an analysis from Fidelity, this strategy worked for investors during the Great Recession. Although many different types of investments lost value at the same time during 2008 and 2009, diversified portfolios lost less than all-stock portfolios and outpaced cash in the subsequent recovery.

While bitcoin was in its infancy during the Great Recession, it’s widely available now. That makes it a viable option for hedging against future financial downturns.

How to Invest in Cryptocurrency for Retirement

Investing in crypto for retirement isn’t the same as adjusting your investment allocation in your 401(k). After all, most 401(k) plans offer a limited number of investments, and cryptocurrencies aren’t likely to be an option.

You can, however, invest in cryptocurrencies in a self-directed IRA. Traditional IRAs and Roth IRAs typically allow investors to choose from a pre-selected menu of stocks, bonds, certificates of deposits, and exchange-traded funds. A self-directed IRA provides the same tax-advantages as other IRAs, but allows investors to hold unique and varied investment options in their retirement account.

There are two basic kinds of self-directed IRAs:

Custodian controlled self-directed IRA. Knowing how many investors are interested in alternative assets, some financial institutions have jumped on the self-directed IRA bandwagon. While some non-traditional investments, such as real estate or tax liens, may be allowed, the custodian may still limit your investment choices. Before you invest, you need to get approval from the custodian. You’ll be charged a fee for their review of the transaction, and there’s no guarantee that they will approve your investment.
Checkbook-controlled self-directed IRA. With a checkbook-controlled self-directed IRA, you have total control over your investments. Essentially, you set up a limited liability company (LLC) owned by your IRA account. Then you purchase any investments you’re interested in–including cryptocurrencies–using a checkbook, debit card, or wire transfer without needing approval from the custodian.

Of course, opening a self-directed IRA and purchasing a whole bunch of one type of cryptocurrency isn’t always the best move, especially if those cryptocurrencies account for a disproportionately large ratio of your retirement portfolio. That’s why cryptocurrency index funds have become more popular.

Typical index funds are portfolios of stocks or bonds. Rather than trying to pick a well-rounded selection of several stocks and bonds, investors can buy into an index fund and get exposure to a large number of stocks in many different markets.

A cryptocurrency index fund follows the same concept but invests in a collection of various cryptocurrencies. Investors buy shares in the fund rather than investing directly into cryptocurrencies, and thus have a more diversified crypto portfolio than they would if they’d invested by themselves.

Cryptocurrency is a promising new asset class with a lot of growth potential. That makes it worth considering as part of a diversified retirement portfolio.

Last updated on June 24th, 2022

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