The world of finance has undergone significant change in recent years due to rapidly changing technology. One of the most important factors in this change has been the introduction of cryptocurrency. As people’s spending habits shift from the High Street to online, it is predictable that alternative currencies and payment methods will appear.
For many people, Cryptocurrency is a challenging concept to get their heads around. However, trading in cryptocurrency has resulted in enormous gains for a fortunate and knowledgeable few. Could this new technology be something to consider to boost your retirement fund? Financial planning can be complex. It is always recommended that you use the services of a regulated advisor like Portafina when making financial decisions. Let’s look at cryptocurrency and its suitability as a secure long-term investment.
What is a cryptocurrency?
One aspect of cryptocurrencies that many people find confusing is that they are classed as a currency. It is challenging for people to relate hard cash as a currency with something digital and as ethereal as crypto. However, relatively speaking, cash itself has not been around for that long. Indeed, a currency is defined as any means sellers and buyers agree as an exchange method between the two.
Let us try and provide a more straightforward definition of a cryptocurrency to keep things simple. It is a digital currency utilising cryptography to provide security. Cryptography means using digital code to secure communications.
One significant benefit of cryptocurrencies is that they operate outside the control of a central authority, such as the government or a bank. Instead, they work through a network of database institutions known as a distributed ledger. This ledger system enables all those within the network to witness transactions. The cryptocurrency transactions within the ledger are collectively referred to as the blockchain.
How the blockchain operates.
The blockchain enables individuals to send and receive money. Others provide security within the network within the chain. The system offers flexibility, speed, and low transaction fees.
Their virtual nature and easy divisibility have boosted the popularity of cryptocurrencies such as Bitcoin. They are popular for people who frequently travel or conduct global business, as governmental interference is minimised. This aspect is particularly appealing to those transacting large amounts of money. But are cryptocurrencies a suitable retirement investment?
Are cryptocurrencies a suitable retirement investment?
Large companies such as Visa and Amazon are starting to investigate how they can use cryptocurrency for everyday transactions. As we move further away from High Street spending and more towards an online economy, cryptocurrencies will likely grow in popularity.
Of course, news stories about huge returns from cryptocurrencies such as Bitcoin have stoked the public’s intrigue. However, bitcoin is an incredibly volatile investment, and as many people have had significant losses as those who have gained. Indeed, investing in bitcoin is equivalent to gambling in that it is very high risk.
If you put all of your capital into bitcoin, you could achieve phenomenal wealth, but you could also lose heavily. Given this, would you be willing to risk your retirement fund on such an investment?
What’s your level of risk?
The idea of an investment with a potentially massive payback can be alluring, especially to new or young investors. However, the critical consideration of such investments is the risk. Investing in cryptocurrency is a high risk, which is at odds with a stable strategy needed for your retirement fund.
Traditional methods of retirement investing.
Most people don’t have an interest or understanding of the investment world. Instead, fund managers and financial advisors ensure your money gets invested in the right place. However, there is no guarantee your money will grow, as the economy can retract and expand. As such, how your finances end up is not entirely predictable.
To mitigate this risk, you can set parameters based on the level of risk you are willing to tolerate. For instance, whether you want to put your money into low, medium, or high-risk investments.
Certain investments, including cryptocurrencies, are highly volatile. This means the price value can fluctuate considerably and quickly. Such investments are considered high risk. Other investments fluctuate less, so they are a lower risk. The key to successful investing is to mix low, medium, and high-risk investments. Doing so will allow you to benefit from high-risk gains while having protection through your lower-risk stable investments.
Investing for your retirement is a long-term process. Over the decades, the economy will see many peaks and troughs. This longevity will reduce the effect of any losses and maximise your gains, as these will be reinvested.
Your funds will be invested in various financial vehicles, including commodities, property, technology, foreign exchange, etc. Again, your level of risk acceptance will depend on those used and how much funds go into them.
Should you include cryptocurrencies?
In short, no! We’ve already mentioned how volatile cryptocurrencies are, so they carry too much risk to be part of your retirement investments. Also, the cryptocurrency market remains unregulated, fuelling further volatility.
Of course, there is an element of risk in all investments, but cryptocurrency is a step too far. Even though it has made some people extremely rich, there are as many who have suffered sudden and catastrophic losses.
You should understand the level of risk at which your money has been placed. If you’re not comfortable with the risk involved, you can ask your financial professional to change your investments.
Keep an eye on your investments and their projected outcomes. Doing so well are you to react to changes in the economy and help secure your retirement funds.