Last updated on November 26th, 2022 at 11:07 pm
You have worked hard to save for retirement. Your investments should be on the conservative side as you get closer to that date. Friends may have suggested you buy cryptocurrencies. What do you do?
If you listen to Warren Buffett, you will avoid such a risky asset. Frankly, why do some call the cryptocurrency option in your portfolio a valid choice? The argument is that in a diversified portfolio, you should have alternative investments. Financial products that are based only on what someone is willing to pay for them (more than you did) are hardly a viable choice and offer much risk.
FTX Crypto Exchange to Zero
Where did all of the money go? FTX is broke, inestors money gone
Traditional retirement accounts are starting to offer digital money as a good investment. Federal law permits the purchase of cryptocurrency as part of a 401k program but that does not make it safe. Lots of people are now marketing crypto investments and invite you to join the crypto world. I believe that this “fad” may pass at some point leaving a lot of people hanging.
As Warren Buffett states no to cryptocurrencies
As Warren Buffett states, there is no value generated by such a speculative investment. He suggests that if you want the excitement and volatility that a virtual currency offers, go to a casino. Cryptocurrency such as the bitcoin option should not become part of individual retirement accounts. You should take extreme care with your investment portfolio when you are approaching retirement. If you want to play with a digital wallet on a short-term basis, use your current income. Don’t raid your workplace retirement plans for the capital.
There are many potential investment options available for your nest egg. Just look at the history of cryptocurrencies, they bounce up and down. Some people have lost a tremendous amount because they needed the funds when they were down in value. The crypto markets are highly volatile.
Financial experts other than Warren Buffett also agree with his assessment regarding the use of retirement funds as an investment vehicle for cryptocurrencies. There are serious concerns on the part of governments around the world about the damage digital tokens can cause. Some retailers think they are a good idea only because some of their customer bases want to pay for goods and services with them.
FTX Crypto Exchange, worst case scenario
Since I originally wrote this article, the FTX Crypto Exchange collapsed in a flash. One day there were billions of dollars in Crypto the next gone. Imagine you purchased a square block in New York City (with all those billions). Short of a nuclear bomb, real estate can not disappear in a day. This is not one of those, I told you so stories. This is a fact and I doubt anyone is happy saying that if you had invested in XY or Z you would have been better protected.
The facts are still coming out to the public but one thing that stands out clearly is that Crypto has no foundation. There is no gold or full faith in any government backing it. This is how it can evaporate and do so quickly. We have seen the ups and downs of crypto values in the past. The highs and lows in one day for some crypto can hardly be matched by the stock or any other market.
It’s clear that if you are risk averse, buying crypto may be a rough ride.
Compare real estate to digital currency
Compare real estate to a digital currency. Which do you think will rise in value over time with little risk? Every investment has risks. Depending upon your age, you can take more or less risk. People in their 20s can take the most risk they have years to save for retirement. Even when you have years to earn, putting a significant amount of your retirement into cryptocurrency is not suitable for the long term.
Financial institutions are under pressure from a minority of their customers to offer bitcoin and other cryptocurrency options. Some think that the great recession is near and we are in the early stage. They want to hold cryptocurrency as a hedge against the value of the legal tender. They think their crypto assets will overcome the recession.
Your financial advisor was recently warned by the Biden administration about recommending the use of 401k’s to purchase cryptocurrencies. One reason why some elements of society are against cryptocurrencies is the use of electricity to mine the coins. They run banks of computers 24/7 to mine bitcoin for example.
Mining coins is energy-intensive
The use of electricity in turn causes more greenhouse gasses. If you need a good reason to stay away from cryptocurrencies, consider their impact on the environment as a bad thing. Social media is all over the place on this topic so don’t go there for advice. Pay attention to the real experts who have their own money invested in solid equities, real estate, gold, and things that have substance.
Strip emotion from your investment decisions. Just because cryptocurrencies are a hot topic now, does not mean you need to deviate from a solid strategy to increase your retirement portfolio. Protecting your retirement nest egg should be the most important thing you can do to ensure that you have a comfortable retirement.
Cryptocurrencies are so last year. Many people buy them for fun and to play. Don’t play with your retirement funds. Those retirement savings you have been so careful to accumulate can be gone in a heartbeat with a very volatile investment.
The price of bitcoin has been all over the board
The price of bitcoin has been all over the board. If I had invested in it, my heart would have skipped many beats. Some will point to the large sums they have made with their investment. Of course, this is the case. This type of pyramid scheme relies on someone willing to pay more than you did.
Someone will for a while. Someone always wins with these non-asset investments. You are gambling and there are always winners and losers. The problem with using your retirement investments is that cryptocurrencies do not pay dividends and when you need them will the funds be there?
Your assets should be in secured instruments, the stock market is an example. Digital assets exist only on a computer. You can not visit them. If you own a piece of Apple, for instance, you can see their building and their phones. There is substance to these investments. They are regulated and must report to you.
If stocks are not performing, change your investments
You can see how well they are doing. If stocks are not performing, you can take appropriate action to change your investments. Low-fee index funds are far better than investing in cryptocurrencies as far as reducing risk. Cryptocurrencies offer a lot of risks compared to mutual funds for example.
Many financial firms are jumping in on Cryptocurrencies. According to the New York Times, banks tried to crush crypto now they are offering it. Even the Motley Fool who was against Crypto caved. Ask yourself, are these firms now offering crypto because they think it is a good investment? I do not believe so.
They are offering it because everyone else is offering it. Financial services firms who are offering crypto programs are doing so as part of a trend and they do now want to be left behind.
Don’t misunderstand me about cryptocurrencies
Do not misunderstand me about cryptocurrencies. I am not saying there is not a place for them as an investment. If you have a lot of money saved for retirement and have extra funds, by all means, have fun. Perhaps you can be the person who makes millions with your investment.
What I am clearly saying is that most people do not have sufficient funds to retire comfortably. If this is your case then you do not have funds to risk on cryptocurrencies. You need to take a good hard look a the cost of retirement and the income you will expect from all sources. If you are one of those in the minority with lots of resources, you are the type of person that the crypto industry wants as a client.
Elon Musk has created his cryptocurrency. That’s great for Elon, he has the money to spend. Most of the people who read this article will not have Elon’s financial resources. The last thing you want to do is to play Elon with your hard-earned retirement account. As I mentioned, if you want to play with cryptocurrency put aside a small amount from your salary for that purpose without reducing your overall retirement contributions.
Don’t forget to pay taxes
Don’t forget to pay your taxes. The IRS considers cryptocurrency to be an investment like any other. When you earn income by selling for more than what you paid, you must add the gain to your other income on your annual tax return. Even the government must get its fair share of your good fortune.
If the sale is inside of a 401k, the same rules apply, and tax is deferred. Don’t forget to include your gains in your tax return. Some early adopters failed to understand how far-reaching the IRS is and failed because they thought they would not get caught.
The United States government is formally opposed to Cryptocurrencies. As it happens so is the government of China. The reasons are the same, sovereign governments want to maintain control of their currencies.
You should read more about this aspect of Cryptocurrencies. Unless governments embrace some form of cryptocurrency, bitcoin blockchain and other crypto curliness will be at odds with paper currencies. This is a weak link that has to be worked out.
Please read more
Thank you for reading this article. Please read other articles at RetireCoast.com including this one Retirement in five years: Don’t fail to plan now, and Start now, plan your lifestyle change, and Listen to our podcasts on this and other topics by going to your favorite podcast app or clicking below to listen.
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