A recent survey of 1,037 investors by GOBankingRates revealed extensive information about the financial habits and characteristics of cryptocurrency investors. One of the most interesting revelations was that a whopping 40% of female crypto investors have savings as a goal for their cryptocurrency. This contrasts with just 27.46% of men who invest in crypto for savings. But while saving as much money as you can is generally a good long-term financial strategy, cryptocurrency has little in common with more traditional savings options.
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Cryptocurrency Is Very Different From a Savings Account
A traditional savings account exists to provide a generally modest amount of interest in exchange for absolute security. Savings accounts are FDIC-insured for up to $250,000, and many brokerage firms provide additional insurance that could protect up to $25 million in savings, or even more. Typically, savings accounts pay more interest than checking accounts, but they aren’t meant to be investments that can beat inflation or provide you with significant returns. The bottom line with savings accounts is that they are meant for capital preservation, even at the cost of upside returns.
This investment profile is the exact opposite of what cryptocurrency is. Cryptocurrency is neither regulated by any government entity nor insured in any amount, and its volatility is legendary. While you might end up with significant gains if you can buy the right crypto at the right time, even this potential is incredibly speculative. It’s one thing to buy some cryptocurrency with excess savings that you can afford to lose, but it’s another thing entirely to consider cryptocurrency a safe place to put the money that you need to protect.
Yet, that is how a significant amount of female investors in the GOBankingRates survey indicated they used their crypto. Only 13% of female investors indicated they chose crypto to make a quick fortune.
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Cryptocurrency Should Not Dominate Your Savings
Given the volatile characteristics of cryptocurrency, it’s clear that it should not dominate your savings plan. In fact, legendary investor Charlie Munger, the co-chair of Berkshire Hathaway along with Warren Buffett, recently opined at the company’s annual meeting that “When you have your own retirement account, and your friendly adviser suggests you put all the money in into bitcoin, just say no.”
But if you fully understand the risks involved with cryptocurrency, other experts suggest that some small allocation is appropriate in an investment portfolio. For example, Ivory Johnson, CFP and founder of Delancey Wealth Management, said that “If you put 20% in crypto and you can’t stomach volatility, you’ve got what’s known as a problem, but if you’ve gone 1% or 2% or 3%, it’s not as big of a hit to your portfolio.” Johnson also suggests that investors avoid trying to time what is a highly volatile market.
Crypto May Be a Good Way for New Investors To Get Excited About Saving
On the plus side, the excitement over cryptocurrency has opened investing to a new wave of first-timers. With Fidelity opening up retirement plans to bitcoin investing, other firms are likely to follow suit, which will make crypto investing more mainstream and bring it to additional investors.
There are certainly risks involved in this approach, as it exposes new investors to levels of volatility that they may not be comfortable with. But if you choose to open a retirement account to invest in some crypto, you may also see how it compares in terms of risk and reward to other forms of investment, such as stocks and bonds.
One compromise solution to investing in crypto without taking on undue risk is to simply raise your total retirement contribution, with the excess amount going into crypto. For example, if you are currently saving 10% of your salary in stocks, you might bump that percentage up to 12%, with the additional 2% going into crypto. That way, you still maintain your core investments while adding some of the excitement and potential of crypto to your savings.
Cryptocurrency Remains a Speculation
Everyone is waiting for the “turn the corner” moment when crypto becomes a viable alternative for fiat currency, or possibly even supplants it. This would provide some type of floor for crypto valuations, and it would likely drive the market much higher. However, that day may never come. There are still a number of viable scenarios in which most if not all cryptos go to zero.
According to the U.S. Department of Labor, ″At this early stage in the history of cryptocurrencies … these investments present significant risks and challenges to participants’ retirement accounts, including significant risks of fraud, theft, and loss.”
This doesn’t add up to a recipe for core savings. In fact, it’s the very definition of speculation. As long as you understand the risks involved and have used them as a counterweight to the immense speculative possibilities of cryptocurrency, you can go ahead and save or invest in crypto. But unlike with a traditional savings account, your crypto investments should only be money that you can afford to lose, not money you need to protect.
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Why Women Are Investing in Crypto — It’s Not Why You Think
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