There has been renewed interest in the cryptocurrency space recently due to a resurgence in Bitcoin prices, in part due to the Securities and Exchange Commission's (SEC) approval of the Spot Bitcoin Exchange Traded Fund (ETF) in January. It has become.
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This has not only brought institutional legitimacy to the sector, but also made cryptocurrencies more accessible, as the numbers prove. As of April 9, the Bitcoin Spot ETF had $56.35 billion in assets, according to data from The Block.
Reyhane Sharif-Askari, head of products and research at Grayscale, said: “Cryptocurrencies have historically tended to yield strong returns, which is why many investors are choosing to invest in cryptocurrencies in retirement or tax-advantaged accounts. We are considering allocating it.” “When making this decision, investors should consider their crypto allocation in light of their broader investment portfolio, risk appetite, and income needs.”
Grayscale is one of the companies that launched a spot Bitcoin ETF in January. As of April 9, the company had $23.1 billion in assets under management.
Underscoring the growing interest, an Unchained survey found that 23% of U.S. investors who do not own Bitcoin plan to invest in Bitcoin in 2024 through a 401(k), IRA, or other retirement plan. I understand that you are considering investing.
Experts currently recommend diversification as the basis of a safe and balanced retirement portfolio, but advice differs on whether to include cryptocurrencies in that portfolio.
So how much cryptocurrency should you include in your retirement portfolio?
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less than 5%
Some experts argue that investors should allocate up to 5% to cryptocurrencies due to their inherent volatility.
“The allocation of cryptocurrencies in your retirement portfolio will vary depending on your personal risk tolerance and financial goals,” said Michael Collins, CFA and founder and CEO of WinCap Financial. “However, our general guideline is to allocate less than 5% of your portfolio to crypto assets. To ensure transparency, we believe you can get a better risk-reward profile from small-cap stocks. Therefore, our clients do not own cryptocurrencies in their retirement portfolios.”
Grayscale's Sharif Askari echoed the above sentiment, saying that allocating around 5% of your portfolio to cryptocurrencies can be beneficial for investors who would otherwise have held a classic mix, even if their portfolio has high volatility. , said research suggests it may offer the highest risk-adjusted returns on average. About stocks and bonds.
“Cryptocurrency is a volatile asset class, so a little goes a long way,” Sharif Askari added.
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The goal is 5% to 10%
Although cryptocurrencies are generally considered risky assets, Michal Rozanski, co-founder and CEO of Empirica, said cryptocurrencies still have the highest risk-reward ratio of any asset class. It claimed to be one of the things it offers.
“So depending on how close you are to retirement, I recommend allocating 5% to 10% of your retirement portfolio to it,” Rozansky said. “While we expect volatility in this asset to remain high, the low correlation between cryptocurrencies and traditional asset classes will encourage diversification in retirement portfolios.”
Stephen Kates, CFP and principal financial analyst at Annuity.org, agreed with this premise. He said that because most cryptocurrencies are highly correlated with each other, investors should not invest more than 5-10% of their portfolio in any single investment, and should not exceed these thresholds. He said that it should not be done.
“Correlation is the likelihood that two or more investments will move in the same direction at the same time. This may sound great when prices are rising, but it can be detrimental to your portfolio when prices are falling. It could be a disaster,” he added.
completely depends on your situation
Cliff Ambrose, FRC, Founder and Wealth Manager at Apex Wealth, argued that when considering incorporating cryptocurrencies into a retirement portfolio, the optimal allocation depends on a variety of factors. These include risk tolerance, investment objectives, and time horizon.
However, he also said that while there is no one-size-fits-all answer, financial experts often recommend a conservative approach, with crypto allocations typically ranging from 1% to 5% of the total portfolio.
“This allocation allows us to provide exposure to the upside potential of cryptocurrencies while mitigating the volatility and risk inherent in this asset class,” he added.
Other experts also point out that asset allocation requires long-term thinking, but protects your net worth from short-term fluctuations.
“Therefore, volatile investments typically occupy a smaller portion of a portfolio than traditional stable investments such as high-dividend stocks or high-quality bonds,” said Vijay Malloria, co-founder of The Cash Square. I will stay.” “Cryptocurrencies are very volatile, so we recommend starting small and dollar-cost averaging over time.”
Nothing?
Meanwhile, some experts advise against including cryptocurrencies in retirement portfolios, saying they are too risky and akin to speculative investments.
“The answer is simple: zero,” says Robert R. Johnson, professor of finance at Creighton University's Heider School of Management. “The crypto market is never a good place to invest. At times, for some people, it has become a profitable place for speculation. My mantra is: Say no!” It should guide your actions regarding cryptocurrencies and retirement accounts. ”
Johnson said investing in Bitcoin and other cryptocurrencies is pure, unadulterated speculation.
“Cryptocurrencies don't create anything, a fact that Warren Buffett eloquently explained at Berkshire Hathaway's annual meeting in May,” he said.
Other experts also noted that it was difficult to understand the argument as to why an unproven, speculative asset class would be considered the burden of supporting a lifestyle for decades.
That's why Jake Falcon, CEO of Falcon Wealth Advisors, argued that cryptocurrencies don't belong in retirement portfolios at all.
“Cryptocurrency should only be considered for assets that you are willing to lose completely and that are not earmarked for something important like retirement,” he added.
And as Scott Lieberman, founder of Touchdown Money, explains, “As you get older and don't have the luxury of time to replace what you've lost, you need to protect what you have.” In that case, he argued that it would be better to limit cryptocurrencies. investment.
“Cryptocurrency is a high-risk opportunity, so you have a much higher chance of losing it to zero than stocks or mutual funds. If you’re in your 30s, you can probably withstand that level of loss. If you’re in your 50s, In the second half, accepting that loss could be a disaster,” he said.
Cryptocurrency investment: Which direction?
There are now several ways to incorporate cryptocurrencies into retirement accounts, with Spot Bitcoin ETFs in particular opening the door to easy access.
One important factor to consider is diversification. According to WinCap's Collins, he doesn't put all his eggs in one basket.
“This means not only investing in various cryptocurrencies such as Bitcoin, Ethereum and Litecoin, but also considering other types of assets such as stablecoins and decentralized finance (DeFi) tokens. “It could mean,” he suggested.
“Keeping in mind the volatility of the crypto market, it is also important to regularly re-evaluate your portfolio to ensure your allocation is in line with your overall financial plan and risk tolerance,” he added. .
When it comes to ETFs, they offer a more diversified and regulated approach to investing in cryptocurrencies. Apex Wealth's Ambrose said this could be attractive to retiree investors looking for extra security and convenience.
Ambrose noted that ultimately, decisions about the allocation and type of crypto assets in a retirement portfolio should be consistent with an individual's risk tolerance, investment goals, and overall financial strategy.
Seeking advice from a financial advisor who understands both traditional retirement planning and the nuances of crypto investing can help investors effectively navigate this evolving landscape, he says. concluded.
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This article originally appeared on GOBankingRates.com: How much Crypto Be a Part of Your Retirement Portfolio?
