Cryptocurrency is one of the latest phenomena in the investing world, and some people have made millions by investing early.
Over the past year, the price of Bitcoin (BTC -4.46%) has surged by more than 300%. Despite taking a tumble over the past couple of months, its price is soaring yet again -- making it an appealing option for those looking to jump-start their retirement savings.
Because Bitcoin has experienced such explosive growth, it can be tempting to put your life savings behind the cryptocurrency to retire wealthy. But is that the right move?
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Is Bitcoin a smart retirement investment?
For most people, personal savings will make up the majority of their income in retirement. Social Security benefits are designed to replace only around 40% of your income, and unless you have access to a pension or some other source of guaranteed income, the rest will need to come from your savings.
Because you'll probably be depending on your savings to make ends meet in retirement, it's important that your investments are relatively stable. If your stocks suddenly plummet in value, that's less money in your retirement fund -- which can be detrimental to your financial future.
For that reason, retiring on Bitcoin alone can be incredibly risky. Bitcoin is famous for its volatility, and it's even lost more than 80% of its value in the past. While everyone has a different tolerance for risk, few retirees would be able to sleep at night knowing their savings could potentially plummet by 80% or more in a short period of time.
Bitcoin Price data by YCharts
In addition, nobody knows for certain whether Bitcoin will still be around in a few years or decades. While there is a chance it will become a mainstream form of currency someday, that's not guaranteed. If you invest all your savings in cryptocurrency and it doesn't succeed, your retirement could be at risk.
Invest in Bitcoin while keeping your retirement safe
If you're eager to jump on the cryptocurrency bandwagon, there's nothing wrong with that. But there are safer ways to invest in Bitcoin without risking your financial future.
First, make sure you're investing only a relatively small amount of money that you could afford to lose. Exactly how much you invest will depend on your financial situation and tolerance for risk, but it shouldn't be so much that you would struggle to pay the bills if you lost your entire investment.
Next, double-check that the rest of your portfolio is properly diversified. By spreading your money across a wide variety of stocks from multiple industries, your overall investment portfolio won't be as affected if Bitcoin doesn't perform well.
Finally, invest in Bitcoin only if you believe it has long-term potential. Investing isn't a "get rich quick" scheme, and it's nearly impossible to make millions overnight. But if you believe Bitcoin has value and are willing to hold your investments for years or decades despite potential volatility, you could make a lot of money over time.
Bitcoin is risky, and banking your retirement on it can be dangerous. But that doesn't mean you can't invest at all. By being strategic about how and where you invest, you can keep your retirement safe while still maximizing your savings.
