Bitcoin (BTC -1.41%) is the best known of the cryptocurrencies, and it's seen a rapid increase in price since the virtual coin was introduced. Many prominent financial experts have endorsed investing some money in Bitcoin, including Dave Ramsey and Suze Orman.
But even if putting some money into Bitcoin could potentially be a valid investment approach, you definitely shouldn't make it the centerpiece of your retirement saving efforts. Here's why.
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You need to diversify, even with Bitcoin
Bitcoin has seen explosive gains since the virtual coin was created, and there's definitely an argument to be made that you could make a lot of money by investing in it.
But the problem is that its real-world utility is still currently limited, and it has a relatively short track record compared to many other assets you could invest in. It's impossible to know what the future holds for Bitcoin. And with the coins only having value because people believe they do, there's a very real chance that an investment in Bitcoin could end up being a loser over the long term.
While Bitcoin may be riskier than many other investments, such as index funds or stocks in established companies, that's not the only reason you shouldn't count on it to make you a retired millionaire. You shouldn't base your entire retirement portfolio around any single investment, whether Bitcoin or shares of Apple (AAPL -2.19%) or even an S&P 500 index fund.
That's because putting all of your eggs in one basket is simply too risky when it comes to retirement. Retirees cannot live on Social Security alone as it is meant to replace just 40% of your pre-retirement earnings. You need to have a sizable nest egg to cover the necessities without a lot of financial struggle, so you need a retirement portfolio that doesn't expose you to too much risk.
The best way to build such a portfolio is to invest in a wide mix of assets, including stocks, bonds, index funds -- and cryptocurrencies, if you're interested in buying them. By mixing some higher-risk assets with the potential for higher returns (such as Bitcoin) and others with lower risk that limit the returns you can earn (such as S&P 500 ETFs), you can maximize your chances that your retirement nest egg will be large enough to live on.
Aside from these issues, there are some other practical considerations. Most 401(k)s won't allow you to buy Bitcoin. And you likely want to put at least some money into your 401(k) so you can earn your company match.
If you've done your research, you believe in the future of Bitcoin, and you want to add some of it to your savings, there's nothing wrong with that. Just don't make it your sole investment to provide for your future. You could end up seriously regretting it if the virtual currency can't stand the test of time.
