"Investing in Bitcoin or other alt-coins can be highly speculative, volatile, and risky. It's important to look past the hype and educate yourself before adding crypto to your portfolio, especially as you near retirement."-
Eric CoonsIt's hard to read a financial column or watch a video on investing without encountering at least a brief mention of Bitcoin (BTC) or other cryptocurrency tokens. In fact, in 2020, BTC gathered more mainstream attention than ever when it managed to beat both the S&P 500 and gold.
This eye-opening accomplishment served to highlight continued investor longing for better returns and an increasing appetite for using technology to help solve economic challenges.BTC, Ethereum, and other so-called "alt-coins" continue to realize impressive returns, further fueling the hype.
The mainstreaming of alt-coins has led some pre-retirees and retirees to wonder if adding cryptocurrencies to their portfolios is a sound strategy.What is cryptocurrency anyway?
Many cryptocurrencies work on a platform known as the "blockchain." In simple terms, a blockchain is an ever-evolving list of records known as blocks.
These blocks are linked using a complex form of cryptography that creates a kind of digital ledger. Duplication of this ledge and its transactions are recorded across an entire computer network.
Since blockchain files are recorded on multiple computers instead of in a single location, it is virtually impossible to hack, modify, or cheat the system. The grandfather of blockchain-based technology, Bitcoin, remains the most popular and valuable crypto coin in a field that has now swelled to over 8,000 alt-coins. The first Bitcoin transaction was in 2009 when the unknown inventors of the technology sent 10 Bitcoin to a cryptographer. By 2010, Bitcoin was on its' way to becoming the standard for cryptocurrencies.Should you add Bitcoin to your investment matrix?
While it holds the promise of a fairer, less centralized monetary system, blockchain technology remains a largely unproven technology. Alt-coins are prone to instability and the whims of the marketplace. Also, while some countries are in the process of developing their own cryptocurrencies, alt-coins are not currently insured by the majority of the world's governments. Because most people lack a basic understanding of how the technology works, there is a challenge for investors to make sound decisions not based on hype and speculation. If you are thinking about investing in Bitcoin or another alt-coin, you must do as much research and due diligence as possible.Before investing even one penny, it's wise to:
Cryptocurrency is an exciting but complex addition to the financial landscape.
- Discover the basics of blockchain technology and the types of coins available. As Warren Buffett has said, it's not a good idea to invest in anything you don't understand. Many websites, videos, and podcasts exist that can help beginning crypto enthusiasts with the fundamentals.
- Know WHY you want to add cryptocurrency to your portfolio. Are you interested just because you want to be on the bandwagon? Are you curious about the technology and want to experiment? Do you genuinely feel cryptocurrency will assist you in achieving your financial goals?
- You must know and accept the risks. If you cannot afford to lose the money you're putting into a crypto account, then you shouldn't expose yourself to risk. Digital currencies are highly speculative.
- Join an online group for beginning crypto enthusiasts. There is an active and robust crypto community online. There, you'll meet other enthusiasts, discover more about the crypto industry and get a feel for the best times and suitable currencies for investing.
- Beware of scams. As with all new technologies, there are opportunities for scammers in the cryptocurrency world. Please do your due diligence when it comes to working with a digital wallet company. If someone promises you guaranteed returns or massive profits, even if that person is a celebrity, be skeptical.
- Review your decision to purchase cryptocurrencies with your trusted financial advisor, CPA, or retirement strategist. You must know the impact of investing in this new technology on your retirement and income planning.
While it does provide unique opportunities for diversification and potential wealth creation, its' instability may make it unsuitable for many investors, particularly those at or near retirement. Until Bitcoin and other alt-coins become less volatile and more standardized, caution when investing in cryptocurrency will remain a best practice.