The Motley Fool

Relying on Bitcoin to grow your retirement savings? I think that’s a major mistake

It can be difficult to decide where to invest when planning for retirement. For individuals who have a long time until they plan to retire, there’s an obvious temptation to take significant risk, since there may be time for falling asset prices to recover. Even for individuals who are closer, there may still be a desire to generate capital growth in preparation for the purchase of income-producing assets in retirement.

While this may be a sound idea, buying Bitcoin in order to generate capital growth could be a major mistake. The virtual currency appears to lack investment appeal compared to a variety of other assets, with its risk/reward ratio seemingly unfavourable versus a wide variety of shares.

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Risky assets

Buying shares at the riskier end of the investment spectrum is a lot different than buying Bitcoin. With shares, it’s possible to obtain a good idea of their valuation through the facts and figures available so an investor can determine whether they offer good value for money. While this may not necessarily mean they are set to rise in future, it does help to deliver a more favourable risk/reward ratio.

Similarly, it’s possible to assess the financial health of a business. Riskier stocks may be smaller and less diversified than their larger peers, with their balance sheets and cash flow statements providing guidance on the level of risk that they may face. Investors, though, will be able to understand the risks they are taking on through buying such companies, since there are rules and regulations concerning the disclosure of a variety of information that must be undertaken on a regular basis.

By contrast, Bitcoin doesn’t offer any information on its potential level of risk. There are no facts and figures available for investors to mull over before buying. Furthermore, there’s no way of determining its potential valuation, and whether it offers a margin of safety. In fact, it could be worth significantly more than its current price, or significantly less, and investors would have no way of being able to ascertain which one is correct.

Diversification

As ever, diversifying among risky assets is crucial when investing. Few investors would ever contemplate buying just one high-risk stock within their portfolio, since common sense says that if it experiences financial difficulty that leads to a lower share price then it will severely hurt an investor’s total returns.

However, some investors seem content to buy a significant amount of Bitcoin. As its track record has shown, it can be a volatile asset which may lose a significant portion of its value in a short space of time. As such, diversifying is highly important. But with it being the pre-eminent virtual currency in many investor’s minds, diversification may not be something they consider.

Takeaway

While taking risks over a long-term time horizon may be a good idea, buying a range of shares could be a better move than buying Bitcoin. They may be volatile, but offer investors the chance to ascertain their potential value, as well as their level of risk.

By contrast, buying Bitcoin appears to be a ‘known unknown’, with a lack of fundamentals or diversification potential. Therefore, buying it could prove to be a mistake, having a significant opportunity cost versus investing in shares.

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