The Pros and Cons of Adding Crypto to Your Retirement Fund

It is easier than ever to put cryptocurrency into your retirement portfolio. There are a couple of ways you can do it, some of which come with tax benefits. For example, you can add crypto to some IRAs and certain 401(k)s. You can also buy it directly from a cryptocurrency exchange or set up a self-directed IRA.

But just because something is easy, it doesn't necessarily make it a good idea. Let's look at some of the pros and cons.

Pros of putting crypto in your retirement fund

Here are a few potential benefits to adding crypto to your retirement plan.

Potential for outsized gains

Bitcoin has outperformed many other more established assets over the past decade. In the last five years alone, Bitcoin's price has increased by more than 800%, per CoinGecko data. For some investors, those numbers are tempting.

It's understandable to want to boost your retirement balance, but be sure to evaluate the risk versus the potential returns. Some experts predict Bitcoin is only at the beginning of its journey, price-wise. Others say it could collapse completely. Either way, now that Bitcoin is more established, we're unlikely to see such staggering price gains again.

If you do want to get a piece of the Bitcoin action, companies like BitcoinIRA can help. They will work with you to find the right crypto IRA and get it set up.

Diversification

Several studies show that younger generations are unconvinced that stock market investments will help them build wealth. They are looking for ways to diversify their portfolio beyond traditional assets, and crypto offers exactly that.

Having a mix of assets in your portfolio is the investment equivalent of not keeping all your eggs in one basket. You might include crypto alongside traditional investments such as stocks, bonds, and real estate. A diversified portfolio helps you benefit when one asset gains, but it doesn't leave you exposed if it performs poorly.

Hedge against inflation

Bitcoin is often proclaimed as a hedge against inflation, though not everybody agrees. Inflation can be particularly difficult for retirees because it reduces the spending power of their nest eggs. With its fixed supply, Bitcoin's proponents view it as a type of digital gold -- something that will hold its value even if the dollar doesn't.

Cons of putting crypto into your retirement fund

There are certainly attractions to holding crypto. But there are also reasons to be cautious.

It is volatile and its value could go to zero

The cryptocurrency market is relatively new and extremely unpredictable. At best, its critics view it as speculative. At worst, it can be a gamble.

When we're talking about the money you will need in your old age, security matters. Particularly if you're close to retirement age when a significant drop in your portfolio value could derail your plans.

If you put crypto in your retirement account, make sure it only represents a small portion of your wider portfolio.

It isn't an option in all retirement accounts

You might decide you're comfortable buying and holding crypto directly and don't want to put it in a tax-advantaged account. But if you do want to put it into a top IRA or 401(k), it isn't always possible. It is easier now that spot Bitcoin and Ethereum ETFs are on the scene, but you'll need to check with your provider.

Other routes include setting up a self-directed IRA that contains crypto or seeing if your crypto exchange can help. For example, Coinbase partners with Grayscale to help its clients integrate crypto into their retirement funds. Depending on what retirement accounts you currently have, you may need to work a bit harder to incorporate crypto into your plans.

The regulatory environment is unclear

Regulatory changes could have a big impact on how investors buy and sell crypto. That's even more the case with tax-advantaged retirement accounts, where federal rules apply on what types of investments are allowed. So much so that, in 2022, the Department of Labor warned 401(k) managers that they may be breaching their duty by including crypto in their plans.

Right now, some parts of the cryptocurrency industry can best be described as uncharted waters. If you put crypto in a tax-advantaged account, you'll need to pay attention to any policy changes so you're not caught unprepared.

Bottom line

Given that many Americans are worried their retirement savings won't go far enough, it's understandable that people want to use crypto to boost their funds. The difficulty is that this is a relatively new and untested asset class and there are no guarantees. Don't gamble with your retirement money -- do your research and make sure you're clear on why you're buying.