The cryptocurrency market has been explosive this year, as more and more investors have rushed to get a piece of it. If you're thinking of putting money into cryptocurrency, you may specifically have your eye on Bitcoin (BTC -2.63%).
Though there are thousands of digital coins in circulation, Bitcoin is among the most recognizable names out there. It's also a bit more stable than other coins in that it's been around for over a decade.
Many people who buy Bitcoin do so on a short-term basis -- they make an investment, wait for it to gain value, and then cash out while they can. But is that the right approach for you? Or is it time to start looking at Bitcoin as a long-term investment -- one that could potentially help fund your retirement?
The dangers of Bitcoin
All investments carry a degree of risk, and there's no getting around that. But the risk that comes with buying a digital currency like Bitcoin well exceeds the risk of putting money into an established, quality stock.
For one thing, while Bitcoin may have been around longer than other digital currencies, it's been around for a lot less time than many of the companies that trade on the stock market today. And while equities experience their share of price fluctuations, Bitcoin has seen some even more intense swings.
But there are other risks associated with Bitcoin. For one thing, we don't know if it will become a widely accepted currency. If it doesn't, the demand for it is apt to plummet. And if Bitcoin demand drops, so will its value.
Also, we don't know what sort of regulatory issues might pop up for Bitcoin and other digital currencies. Until more clarity emerges on that front, it remains a risky prospect.
All of this risk doesn't necessarily make Bitcoin a poor investment choice. But is it a smart investment choice for retirement? Probably not.
Because Bitcoin has only been around for 12 years, there's no way to predict whether it and other cryptocurrencies will be trading two, three, or four decades down the line. And if you're many years away from retirement, that's an unsettling thought.
As such, if you're going to buy Bitcoin today, it helps to stick to a few basic rules:
- Don't invest too much of your money in it.
- Brace for the possibility that you might lose all the money you put into it.
- Plan on holding it for a limited period of time only
A long-term approach is the right call when buying stocks because the market has a history of rewarding investors who stick with it for the long haul. The cryptocurrency market has no such history.
Bitcoin could end up being a short-term moneymaker for you. If that ends up being your experience, take your proceeds and use them to put together a stock portfolio that will set you up for a secure retirement. But don't expect an investment in Bitcoin today to pay your senior living expenses 40 years down the line.