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Opinion: What’s a better investment? Bitcoin or a Roth IRA?

These days, I’m getting more and more questions – mostly from young people – about investing in bitcoin and similar products.

They hear about fast, huge profits. They think they should jump on the ship. Of course, they have also heard of large losses in cryptocurrencies.

But for many young people, the lure of quick and easy money is much more tempting than the risk of losing a shirt.

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I understand. More than half a century ago, I just got wet in the investment business. I did what I thought was an investment (now I realize it was really speculation) on a commodity futures contract.

I doubled the money in less than a week. Man, did I feel smart! I started to understand (I thought) how investing works.

I knew what to do: I took all that money and reinvested in another contract. And quickly lost it all. In the process, I learned a more valuable lesson about how to invest really works: Losses can come as quickly and easily as profits.

I remembered all of this recently while talking (separately) to a few investors who seemed willing to dive into cryptocurrencies. One was 28, the other 30 years old.

The amounts of money they proposed to invest were relatively small – $ 40 in one case and $ 400 in another. Everyone told me it was money I could afford to lose.

I listened to find my way in their thinking interview with an investor in dogecoin who said he turned his first investment into several million dollars.

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As I listened, part of my mind became concerned about the losses it might encounter; the other part of my mind wanted to cheer him up as he fought in what he considered a battle against Wall Street.

The two investors I spoke to seemed to want to show Wall Street how investing really should work. I recognized that feeling.

I knew better than to tell these two what to do. Instead, I tried to educate them.

Bitcoin, dogecoin and many other types of digital currencies do not have a long history. They are not regulated. They are not legal tender. Their value is determined solely by supply and demand.

Both of these young people have jobs. None set aside money in the IRA, which would certainly save them taxes.

So I painted an alternative picture: Within the Roth IRA, their money could grow tax-free. I have described an established investment with a history of above-average long-term returns: low-value companies.

As an asset class, the value of small capitalization has a certain instability that these young people crave. But it also has a history of rewarding investors with patience.

When you study the U.S. index of low-value stocks back to 1928, you’ll see that the average forty-year compound yield was 16.2%. (The best return over a 40-year period was 19%; the worst was 11.6%.)

Towards the lower end of that scale, with 12%, a one-time investment of $ 400 would become $ 37,220 if left alone for 40 years.

Over the years, most young people have been able to afford to invest well over $ 400, of course. But let us trace the results of only this very modest one-time investment.

If you retired with $ 37,220 in a Roth IRA and started taking annual withdrawals of 5%, you would have $ 1,861 to spend in your first year of retirement.

If the investment continued to earn 12%, and you continued to take 5% per year based on a growing balance, you would have $ 8,248 to spend in your 25th (and perhaps the last) year of retirement.

During 25 years of retirement, you would take $ 108,045. Your account at that point would be worth about $ 156,712, which would probably go to the people or entities you designated as users in your IRA.

The math in this scenario is impressive. For just $ 400 (probably less than the cost of a beach weekend getaway) you would earn $ 264,757 – all tax-free.

Just imagine what it would be possible to do with $ 400 each year before you retire.

Of course, this plan has a drawback compared to investing $ 400 in cryptocurrency.

The Roth IRA I described will not blind your friends or give you the right to brag. They won’t let you poke your nose in Wall Street or old people who think people should be reasonable with their money. It won’t make you a fast millionaire or allow you to lose wealth overnight.

In short, it’s pretty boring. Worse, it requires a lot of patience. What a move.

I think there is an environment that could make sense for many people.

Start by maximizing your Roth IRA to $ 6,000 in a year. (Multiply the above numbers by 15 and you’ll see an impressive payout.)

After that, if you can still afford to lose $ 400, invest it in cryptocurrency and see what happens.

Better yet, raise that $ 400 to contribute to the IRA for next year.

Like many people, I was curious about cryptocurrencies and talked to many investment experts. None was able to explain why it could make money for me in the long run. The best reason I’ve heard about investing in bitcoin is some variation of “Going up”.

It reminds me of a quote often attributed to Will Rogers: “Don’t gamble. Take all your savings and buy a good stock and keep it until it grows, then sell it. If it doesn’t grow, don’t buy it. For more information on this topic, here recent podcast I filmed it titled “Sex, Food, Money … and the Impact of Emotional Decisions.”

Richard Buck contributed to this article.

Paul Merriman and Richard Buck are the authors We talk to millions! 12 simple ways to supplement your pension.