Is cryptocurrency your path to retirement?

One of the key principles of retirement saving is diversification. Diversifying with stocks, bonds, mutual funds, exchange traded funds (ETFs), and real estate can help your retirement portfolio weather the market's ups and downs. With Bitcoin, Ethereum, and other cryptocurrencies in the news, you may wonder if you should consider adding them to your portfolio.

Why diversify with cryptocurrency

Risk is inevitable in investing. Interest, inflation, the political climate, and other risks can impact every company and industry. You can't avoid risk entirely, but you can invest in a wide range of industries, companies, and asset classes. That way, if one of them declines due to a market event, your entire portfolio may not suffer.

Cryptocurrencies can be an option for diversifying your investments. But it can be tough to know how they fit into your overall investment strategy.

Financial advisors recommend diversifying with industries and asset classes that are inversely correlated. That means that when one tends to go up, the other tends to go down. For instance, in times of economic growth and consumer confidence, stocks prices tend to be high. On the other hand, investors tend to prefer treasury bonds in times of economic uncertainty. Balancing a retirement portfolio with a mixture of stocks and T-bonds helps diversify your portfolio in an effort to maintain growth whatever the market conditions are.

But cryptocurrencies are a relatively new asset class. According to Gemini, a platform for buying crypto, not enough time has passed to determine a correlation between cryptocurrencies and other types of investments.1 This uncertainty makes it tough for investors and financial advisors to determine how much cryptocurrency belongs in a balanced portfolio.

Can you count on crypto for retirement?

Another factor to consider when investing is the volatility of cryptocurrency. This problem arises because supply of crypto is limited, and there's no central bank to control that supply.2 The lack of supply creates extreme volatility making it possible to earn a significant amount of money in a short amount of time. But this same volatility also means you could lose a lot of money over the same period.

Cryptocurrency and other digital assets also carry higher risks than other investments like stocks, bonds, and mutual funds. This is because they're not protected by the Securities Investor Protection Corporation (SIPC) like these more traditional investments.

If your brokerage firm fails, SIPC insurance will cover up to $500,000 of your loss, including $250,000 of cash.3 Unfortunately, there is no such federally funded protection for crypto. This means you have no recourse if the crypto platform you use folds or you lose your crypto wallet.