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Could You Retire on Bitcoin Alone?

By Robin Hartill, CFP® – Oct 31, 2021 at 5:15AM

Key Points

  • If you'd invested $1,000 in Bitcoin a decade ago, you'd have around $23 million today.
  • Your options for investing retirement money in Bitcoin are limited, as few 401(k) plans allow for crypto investing.
  • Bitcoin may be suitable as an investment, but its volatility makes it a poor fit for retirement money.

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Want to invest your retirement money in Bitcoin? Read this first.

Bitcoin (BTC 0.64%) has crushed the S&P 500 so far in 2021, even after plunging about 12% in the past week. As of Oct. 26, the cryptocurrency was up 106% year to date, compared to 23% for the S&P 500.

The returns are even more mind-boggling when you go back a decade. If you'd invested $1,000 in Bitcoin on Oct. 25, 2011 -- long before crypto went mainstream -- you'd have around $23 million today.

With so much excitement surrounding cryptocurrency, you may be wondering, could you retire on Bitcoin alone? But not so fast. While Bitcoin may deserve a place in your investment portfolio, here's why you don't want to stake your entire retirement on it.

A person reclines on a deck chair.

Image source: Getty Images.

Can you put Bitcoin in a retirement account?

Bitcoin and other cryptocurrencies aren't banned as an investment for your 401(k) or any other workplace retirement account. But it's highly unlikely that your employer-sponsored retirement plan allows you to invest in Bitcoin because your employer is a fiduciary and has the obligation to make appropriate investment decisions. Because Bitcoin is highly volatile, very few employers are willing to offer it as an option. After all, plan participants can sue their employer if they make inappropriate investment decisions.

You could invest retirement funds in Bitcoin by opening a self-directed IRA. However, these accounts tend to have high fees, and not all brokerages offer them.

Using a cryptocurrency exchange is a far more common way to invest in Bitcoin. However, you won't get the tax advantages that make investing in a retirement account appealing.

Bitcoin vs. the stock market

Bitcoin has delivered smashing returns, compared to the stock market over the last decade. But its price has also swung wildly, compared to the overall stock market.  

After briefly crossing the $20,000 mark in late 2017, Bitcoin lost more than 80% of its value over the next year. In May 2021, it dropped by 50%, due largely to a crypto crackdown in China and Tesla CEO Elon Musk's announcement that the electric-car maker would no longer accept Bitcoin as payment.

You don't want to let short-term volatility distract you from your long-term investment goals. But one reason relying on Bitcoin to fund your retirement is problematic is that it's only been around since 2009. Only in recent years has it gone mainstream as an investment.

Bitcoin Price Chart

Bitcoin Price data by YCharts.

Since the cryptocurrency is relatively new, we don't have a lot of evidence to support how Bitcoin will perform decades into the future. However, there's a treasure trove of data about the historical performance of the stock market -- and at no point in the S&P 500 index's history, would you have lost money on a 20-year investment.

Should you invest retirement money in Bitcoin?

The question here isn't, "Should you invest in Bitcoin?" The question is, "Should you invest retirement money in Bitcoin?" If you have a high risk tolerance, Bitcoin may very well make sense as an investment. But it isn't a good retirement investment.

You don't want to stake everything in a single investment, be it an individual stock, a cryptocurrency, or any other asset. Having a diversified portfolio is one of the best ways to protect your nest egg. That's why index funds are a good choice for retirement savings.

The danger of putting all your retirement money in a highly volatile asset like Bitcoin is that the timing of your retirement doesn't always happen according to plan. Many workers have to retire earlier than they planned due to health problems or job losses, or they need to care for a spouse or parent. If you'd need to start withdrawing money after an extreme drop, the damage to your finances could be long-lasting.

If you believe in the future of cryptocurrency and you can stomach the ups and downs, Bitcoin could help you build serious wealth. But tread cautiously. Limit your stake to 5% to 10% of your portfolio, and keep your retirement funds in more predictable investments.

Robin Hartill, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Bitcoin and Tesla. The Motley Fool has a disclosure policy.

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