Cryptocurrency has been creating quite the stir in the investing world lately. While digital currencies have existed for more than a decade, they've recently been making headlines for their soaring prices.
Bitcoin ( BTC 0.73% ) recently reached a high of around $60,000 per coin, and other cryptocurrencies such as Ethereum and Dogecoin have seen explosive growth over the past few months.
Some investors have made a lot of money with cryptocurrencies, and many people believe crypto will only get bigger over time.
If you're currently retired or are close to retirement, you may be considering investing in crypto to boost your income during your senior years. Before you invest, here's what you need to know.
Is crypto a smart investment?
The jury is still out on whether cryptocurrencies will make for good long-term investments. Some investors believe crypto will eventually become a primary form of currency, which could revolutionize the finance and banking industries.
Supporters of Bitcoin have also referred to the cryptocurrency as "digital gold" because there is a finite number of coins available. Like physical gold, Bitcoin could increase in value over time and hedge against inflation.
However, for all the supporters of crypto, there are just as many people who believe it won't succeed over the long run. One of its most outspoken critics is legendary investor Charlie Munger, Berkshire Hathaway vice chairman. During Berkshire's annual shareholder meeting earlier this month, Munger called Bitcoin's rise to popularity "disgusting and contrary to the interests of civilization."
The truth is that nobody knows for sure what the future has in store for cryptocurrency. And that uncertainty makes crypto an incredibly risky investment. It's anyone's guess whether it will succeed or fail, which is a daunting thought when your retirement savings are on the line.
A rollercoaster of volatility
Even if cryptocurrencies do become mainstream and change society as we know it, it could take years or even decades for that to happen. In the short term, crypto is an extremely volatile investment.
Of all the different types of cryptocurrencies, Bitcoin is the biggest name and has the longest track record. However, even it has had a rocky ride. This year alone, it's experienced five significant downturns. As of this writing, its price has fallen more than 26% over the last month.
This type of volatility is difficult for any investor to stomach, but it's especially challenging for retirees and those close to retirement. When you're depending on your investments to pay the bills, the last thing you want is for your portfolio to take a nosedive.
Cryptocurrencies are unpredictable, and buying into them right now is more akin to gambling than true investing. While you could make a lot of money, you could lose a lot of money, too.
Where to invest instead
Cryptocurrency is an exciting new investment, but it's also one of the riskiest places to put your money. So unless you have a lot of spare cash you're willing to gamble with, it's best for retirees to avoid crypto for now.
That said, there are plenty of other investments that carry less risk and can still help you make money. If you still have a few years left to save, investing in S&P 500 ETFs is a great option. These investments are relatively low risk, but they're very likely to earn positive returns over time.
Another option is to invest in dividend-paying stocks. Dividend stocks will pay you a small amount simply for owning them, and over time, those dividend payments can add up to a substantial source of passive income.
These investments may not be as exciting as buying cryptocurrency, but they are much less risky. And when your retirement is on the line, avoiding risk can help you enjoy your senior years much more comfortably.