Should cryptocurrencies participate in retirement accounts? Should investors trade in the short term or buy and hold? And how much is enough to invest in bitcoin and ether?
While cryptocurrencies are becoming increasingly popular as an alternative investment option, many Americans are wondering when and whether to include this nascent asset class in their retirement strategy. The answer: it depends on the situation.
Your retirement plan should consider several factors, including your savings, life expectancy, income needs, and risk tolerance.
However, it’s normal for a retirement portfolio to have some risk, especially when the time horizon is decades. On Barron’s Live Aug. 11, MarketWatch editors Alessandra Marito and Brett Ahrens discuss whether and when to include cryptocurrencies in a retirement plan.
Whether it’s worth including, when and how to include it, and what to expect in the future.
How much of my retirement savings should I invest in cryptocurrencies?
Including cryptocurrencies in your retirement portfolio largely depends on your personal goals, time horizon, risk tolerance, and assets, but it is a way to diversify your investments.
Cryptocurrencies also shouldn’t take up a lot of space in your portfolio: less than 1% is “too small to make sense,” and more than 5% significantly increases risk, so “1-5% is optimal,” according to Bitwise Asset Management. Matt Hogan, chief investment officer at Bitwise Asset Management, said. “But everyone has to make their own decisions.”
One adviser called alternative investments in a retirement portfolio “the icing on the cake, not the cake itself.”
Of course, some investors want to invest in cryptocurrencies in their retirement portfolios. According to Chris Klein, CEO of Bitcoin IRA, a digital asset investment platform, some clients have between 5% and 25% of their portfolio in cryptocurrencies.
Many of these investors appreciate the tax advantages of investing in cryptocurrencies in their IRA accounts.
What are some compelling reasons for which you should invest for retirement? And what are some compelling reasons not to?
Hogan says there are two reasons to invest in cryptocurrencies for retirement. First, they have historically high returns over the past one, three, five, and ten years, but they don’t correlate with traditional stocks and bonds.” Adding uncorrelated assets will increase risk-adjusted returns,” Hogan says.
It’s also a “disruptive, once-in-a-generation technology that will have a huge impact on the world,” Hougan added.
Investing in cryptocurrencies in retirement accounts can also have tax advantages.
These investments are taxed at the capital gains tax rate, and with a Roth IRA, investors get to pay tax upfront on their investments and withdraw them tax-free when they are distributed, as long as they follow the rules properly.
However, there are reasons other than personal circumstances not to include cryptocurrencies in a retirement portfolio.” “The biggest risk in investing in cryptocurrencies is a behavioral risk,” Hogan said.
“Even if these investments perform well and peak in a month, they can fall 50%, causing investors to panic and sell. “If you want to hold assets in volatile times, you have to have a long time horizon.
We ask: How much of your retirement portfolio should be invested in cryptocurrencies and what percentage of your net worth should be invested in these assets? What percentage of your net worth should be allocated to these assets and how should it be allocated between bitcoin, ethereum, and other alternative currencies?
The recommendation to invest a small percentage of your portfolio in alternative currencies such as cryptocurrencies applies to retirement savings and net worth in general, but when looking at net worth it is important to focus on current assets.
Net worth includes the value of your home, but when deciding how much to invest, consider only what you can invest.
“I think it’s important to stay frugal in how you allocate your assets,” Hogan says. Technology is advancing rapidly
“It’s difficult to determine how the technology will evolve and which applications will be important and therefore worth investing in,” Hogan says. When choosing how to invest in cryptocurrencies, be as diversified as you would with any other asset class, and underpriced or overpriced if you feel strongly about a particular type of cryptocurrency.
Hogan says it’s hard to say when and how the U.S. government will take a more cautious stance on cryptocurrency regulation, but it’s inevitable.
However, he thinks this could be a good thing for the product as it becomes mainstream and actively used by all investors.” He says, “On the one hand, these regulations will curb that, but on the other hand, they open up opportunities to improve the ecosystem by creating safe havens and clear rules.
Should you trade or buy and hold cryptocurrencies?
“Trading any asset is difficult, and a volatile asset like cryptocurrencies is complex,” said Hogan. So if you have a choice between trading and holding, it’s best to hold.
But it’s unlikely that anyone can hold a volatile asset like some cryptocurrencies for very long without changing their portfolio or allocation. As with any other asset, it should be reviewed periodically and rebalanced as needed.
Portfolio allocation naturally fluctuates with stock and bond prices, and without rebalancing, the path to achieving a particular goal may be off course.
“Cryptocurrencies are becoming an investment for institutional investors,” Hogan says.” Treat it as such.”
Klein says some investors take a “set it and leave it” approach. You can trade anything, but you don’t see that as much on our platform.
How do you decide when to pull out of these types of investments?
Hogan recommends that when investing in these types of assets, you have a “core belief,” such as how you think the asset will react in the market and that your investment position will change as more information and news about the asset becomes available.
Sometimes bad news can cause an investment to plummet for a few days, but will it recover quickly? What happens to the other assets in the portfolio during that time?” I would say don’t react to short-term events,” he said.
What do you think about the future of cryptocurrencies?
“I think cryptocurrencies will become a normal allocation in many investors’ portfolios over the next five years,” Hogan said. They will become more regulated, more prevalent, and increasingly important to global monetary transactions.
There have been many failed experiments in these markets, but they have grown so much in the last decade that policymakers and Wall Street banks are talking about their future.” Today’s cryptocurrency market is not like the cryptocurrencies of the past,” he said.
