Bitcoin’s volatility makes it a risky investment, experts say

By Finance News On Aug 9, 2024

Bitcoin’s price has been particularly volatile as of late.

The coin both rose and fell this week, at one point dropping by about 7% in a single hour alone. It has since bounced back somewhat, hovering near $59,000 as of Thursday morning, but that’s still down from a $71,000 peak in June.

These recent movements in bitcoin’s price serve as a stark reminder of how erratic the cryptocurrency can be and why financial planners often consider it a discretionary investment.

Although bitcoin’s price has roughly doubled in value since August 2023, it’s not an appropriate investment for everyone, especially those with a lower risk tolerance. Bitcoin’s frequent price fluctuations undermine its reliability as a store of value or as a hedge against inflation, at least in the short term.

And without wider acceptance of bitcoin as a currency, its value seems to largely hinge on speculation and market sentiment, rather than intrinsic value. This makes it a risky asset compared with other investments, like stocks or bonds, which carry their own risks.

So, should it be part of your overall investment strategy? Financial planners differ in their opinions on if or how to incorporate it into your portfolio, but tend to agree it’s a risky bet that shouldn’t be the basis for your retirement savings.

Should you invest in bitcoin?

Despite the risks involved, some financial planners see value in purchasing bitcoin as a speculative asset, but only with money you’d be comfortable losing.

Unlike other cryptocurrencies, bitcoin has a limited supply, which is why it’s often seen as a commodity similar to scarce resources like gold. However, gold has a long history as a reliable store of value, as well as various uses in electronics, dentistry and jewelry. In contrast, bitcoin — which was created in 2008 — is much more speculative as a commodity.

“It’s important to distinguish between essential and discretionary investments,” says R.J. Weiss, a certified financial planner and founder of The Ways to Wealth. “Bitcoin or other cryptocurrencies should not be the cornerstone of your retirement plan.”

For most investors, a well-diversified portfolio that includes stocks and bonds will likely “provide the steady growth needed for retirement,” says Weiss.

That said, a small allocation to crypto — about 1% to 2% of your portfolio — can be considered “if you have a strong interest and understand the risks,” he says.

If you already have bitcoin holdings and the recent downturn in crypto prices is making you queasy, it might suggest your “investment was too large or not well-aligned with your risk tolerance,” says Weiss.

Other experts take a hard line against cryptocurrency.

“I don’t include bitcoin or any other cryptocurrencies in my clients’ portfolios,” says Jing Zheng, a CFP in Virginia. “I view bitcoin as a commodity heavily influenced by market sentiment, without backing by tangible assets or government support. In that regard, how does one even predict its value and…