Bitcoin has performed extremely well in 2017, up more than 200% year-to-date as I write this. Even more significantly, the digital currency is becoming more widely accepted around the world. So, it may seem like a good idea to buy some bitcoin while it's still in the early stages as part of your retirement investing strategy.
Is bitcoin in a bubble, or is it just getting started?
Just before I wrote this article, bitcoin traded above $3,000 for the first time, with this latest leg up mainly fueled by high demand from Asian investors.
There are some who say that bitcoin could now be in a bubble. For example, billionaire Mark Cuban recently said that the digital currency is in a bubble and that it's headed for a correction. "When everyone is bragging about how easy they are making (money) = bubble," Cuban said on Twitter. "Everyone always thinks that this time is different..."
Image source: Getty Images.
However, Cuban also emphasized that he's not saying bitcoin is worthless. The underlying blockchain technology, Cuban says, is very valuable and will be in widespread use in the future. "I'm not questioning value. I'm questioning valuation," said Cuban.
On the other hand, there's also a good case to be made that bitcoin could potentially go much higher. As I wrote in a recent article, it's possible for bitcoin to rise to $1 million under the right circumstances -- specifically, if the currency gets widespread mainstream acceptance and becomes a major player in the global currency market. To be clear, I don't think it's particularly likely to get anywhere near that amount, but it's certainly possible.
Don't be blinded by bitcoin's potential
Here's the main point of this discussion. Just because something has the potential for massive growth doesn't make it a good investment, especially for retirement.
When it comes to retirement investing, slow and steady is the way to go. You want stocks and bonds that aren't going to make you rich overnight, but are likely to grow at a steady pace and compound into a nice nest egg over time. An investment that could potentially make you a millionaire quickly, and is as volatile as bitcoin is should be avoided with retirement savings. It's important not to confuse investing with speculating or gambling. Think of bitcoin as a $3,000 lottery ticket that could potentially win you a lot more money.
Now, lottery tickets can be fun, and I confess to buying Powerball tickets myself when the jackpot gets big. However, I'm not going to pursue lottery winnings at the risk of my own financial comfort in retirement. While the odds of success are certainly higher with bitcoin than with Powerball, the same concept still applies. Sure, it could go to $1 million -- or it could drop back down to one-tenth of its current value, or less. Either scenario is possible, and it's just too much of a gamble to take with money you'll need in the future.
The right way to invest in bitcoin
The short answer to "Is bitcoin a good investment for retirement?" is a resounding no.
Having said that, however, there's nothing wrong with doing a bit of speculating in assets like bitcoin if and only if you're already doing a good job of saving and investing for retirement. In other words, if you're actively contributing to an IRA or are setting aside 10% or more of your salary in your employer's retirement plan, have a properly allocated retirement portfolio, and want to put a small amount of money into bitcoin in addition to this, there's nothing wrong with this approach.
I view this as a similar situation to investing some of your capital in risky stocks, but only as a compliment to a rock-solid "base." As a personal example, I own shares of Fitbit, which I consider to be highly speculative, but my largest stock positions are in well-established companies that won't make me rich quickly, but also have little risk of making me broke.
If you buy bitcoin with the idea that it's a speculative investment in mind, you're setting yourself up to take advantage if the price keeps going up, without putting your own retirement at risk if you're wrong.
