If you’ve been paying attention to the financial news lately, you’ve probably heard about Bitcoin. In case you haven’t (or want a refresher): Bitcoin is what’s known as a cryptocurrency and digital payment system. Essentially, Bitcoin can be exchanged for goods and services – even some major corporations are accepting it as payment now.
Like any other currency, investors are purchasing Bitcoin in an attempt to grow their wealth; based on its likelihood to rise in value in the future. Bitcoin in particular is gaining a lot of attention for this because of its meteoric rise in value. For instance, Bitcoin has had more than 100% growth over the last year alone. So, you’re probably wondering if you should invest in Bitcoin for retirement to harness some of that growth.
Read on for some helpful pointers on if you should invest in Bitcoin:
Keep your diversification in check
Diversification can reduce your risk and increase your returns, because you’re spreading your wealth across multiple investment vehicles. At a first glance, it might appear that when you invest in Bitcoin, you’re increasing your diversification. After all, you’re adding another investment vehicle to your repertoire.
The problem lies in the fact that there is only one version of Bitcoin, so you’re actually concentrating your wealth, and greatly reducing your diversification. It’s the equivalent of buying a stock in one single company, and thinking you have a stock portfolio. While stocks, bonds, hard assets, and other vehicles have multiple, uncorrelated investments within them, Bitcoin will only move in one direction at a time.
Look at the long-term prospects
Wise investors know the difference between long-term risk and short-term speculation. The stock market, for instance, has a relatively high degree of risk in the short-term. Day by day, volatility can cause it to go up and down by fairly large margins. However, academic research and data gives a different perspective over the long-term. Overall, the stock market always sees significant growth over a longer time frame.
Bitcoin, on the other hand, was invented in 2008, so while it’s seen tremendous short-term growth, there is no academic research or data you can rely upon to predict its long-term prospects. While you may continue to see growth in the near-future, an untested and new investment can be a risky proposition for retirement.
Furthermore, while most currencies are tied to one nation (or a group of nations), Bitcoin is decentralized. This can also increase your long-term risks. While nations depend on their currency and back it, Bitcoin is an optional payment method that’s solely supported by its user base. Like any consumer good, that user base could change, or find a better alternative. (In fact, there’s already some speculation about other cryptocurrencies replacing Bitcoin.) Quite simply, there’s no way to know if Bitcoin will even still exist by the time you retire.
The bottom line:
If you want to invest in Bitcoin, you should be aware of the risks involved. While it is interesting to watch, Bitcoin most likely won’t be suited for your long-term retirement goals and needs.
Want to learn more about retirement investing? At LexION Capital, we help clients live a worry-free retirement through bespoke investment portfolios. To learn more, contact us today.
