Could you retire on Bitcoin on your own?

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Bitcoin (CRYPTO: BTC) has crushed the S&P 500 so far in 2021, even after plunging around 12% last week. As of October 26, the cryptocurrency was up 106% year-to-date, compared to 23% for the S&P 500.

The returns are even more staggering when you go back a decade. If you had invested $ 1,000 in Bitcoin on October 25, 2011 – long before crypto became mainstream – you would have around $ 23 million today.

With so much enthusiasm surrounding cryptocurrency, you might be wondering if you could retire on Bitcoin on your own? But not so fast. While Bitcoin might deserve a place in your investment portfolio, here’s why you don’t want to spend your entire retirement on it.

Image source: Getty Images.

Can You Put Bitcoin In A Retirement Account?

Bitcoin and other cryptocurrencies are not prohibited as an investment for your 401 (k) account or any retirement account at work. But your employer-sponsored pension plan is highly unlikely to allow you to invest in Bitcoin, as your employer is a trustee and has an obligation to make the appropriate investment decisions. Because Bitcoin is very volatile, very few employers are willing to offer it as an option. After all, plan members can sue their employer if they make inappropriate investment decisions.

You can invest retirement funds in Bitcoin by opening a self-directed IRA. However, these accounts tend to have high fees and not all brokerage firms offer them.

Using a cryptocurrency exchange is a much more common way to invest in Bitcoin. However, you won’t get the tax benefits that make investing in a retirement account attractive.

Bitcoin against the stock market

Bitcoin has generated impressive returns relative to the stock market over the past decade. But its price has also fallen sharply relative to the overall stock market.

After briefly crossing the $ 20,000 mark at the end of 2017, Bitcoin lost over 80% of its value over the next year. In May 2021, it fell 50%, largely due to a crypto crackdown in China and the announcement by Tesla CEO Elon Musk that the electric car maker would no longer accept Bitcoin as a means of payment.

You don’t want to let short-term volatility distract you from your long-term investment goals. But one of the reasons relying on Bitcoin to fund your retirement is problematic is that it’s only been around since 2009. It’s only in recent years that it has become mainstream as an investment.

Bitcoin price data by YCharts.

Since the cryptocurrency is relatively new, we don’t have much evidence to support Bitcoin’s performance in the decades to come. However, there is a treasure trove of historical stock market performance data – and at no point in the history of the S&P 500 Index have you lost money on a 20-year investment.

Should you invest your retirement money in Bitcoin?

The question here is not, “Should you invest in Bitcoin?” The question is, “Should you invest your retirement money in Bitcoin?” If you have a high tolerance for risk, Bitcoin may very well be a logical investment. But it is not a good investment for retirement.

You don’t want to stake everything in one investment, whether it’s an individual stock, cryptocurrency, or any other asset. Having a diverse portfolio is one of the best ways to protect your nest egg. This is why index funds are a good choice for retirement savings.

The danger of putting all of your retirement money in a highly volatile asset like Bitcoin is that the timing of your retirement doesn’t always go as planned. Many workers have to retire earlier than expected due to health issues or job losses, or they have to look after a spouse or parent. If you were to start withdrawing money after an extreme fall, the damage to your finances could be lasting.

If you believe in the future of cryptocurrency and can handle the ups and downs, Bitcoin could help you build significant wealth. But walk carefully. Limit your participation to 5-10% of your portfolio and keep your retirement funds in more predictable investments.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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