Bitcoin in your 401(k)? Here’s what to consider before deciding if it’s right for you
Fidelity Investments recently announced plans to allow investors to purchase Bitcoin through their 401(k) retirement plans. From the end of this year, workers will be able to have the choice of buying cryptocurrency, but only if their employer uses Fidelity for their plan and allows the option to do so.
Investors could add up to 20% of their 401(k) balance to digital currency, according to Fidelity, although individual employers can limit that to a lower percentage for their workers.
The ability to invest in Bitcoin or other cryptocurrencies has been almost non-existent in 401(k) plans so far. This makes the move by Fidelity — one of the nation’s largest pension plan providers — a watershed moment for the nascent crypto industry. It also comes at a time of increasing regulatory openness to 401(k) plan investment in alternative high-risk assets.
With bitcoin possibly becoming available in your 401(k) plan in the near future, here’s what you need to know about investing in crypto and why many experts are saying to stay away.
3 Things to Consider Before Adding Bitcoin to Your Retirement Savings
Here are three things experts say you should know about Bitcoin before you even think about putting your hard-earned money into this or any other cryptocurrency.
1. Bitcoin is not backed by anything
The price of Bitcoin has risen in recent years, after starting from nothing, and this may have given the impression that there is an underlying value to the cryptocurrency. But it is absolutely vital to understand that Bitcoin is not backed by anything, unlike stocks or bonds.
When investors buy a stock, they own a fractional stake in a company. Over time, the stock will rise and fall based on the performance of the underlying business. So very successful companies such as Amazon will have stocks that will rise in price significantly over time. In other words, the stock is backed by the assets and cash flows of that underlying company.
In Bitcoin’s case, there is nothing behind it – no assets or cash flows that support its value.
“There is no rational or fundamental way to determine the value of Bitcoin or any of the other cryptocurrencies, as one cannot apply the tools of traditional finance to arrive at intrinsic value (or real value) of the assumed asset,” says Robert R. Johnson, Professor, Heider College of Business, Creighton University.
“There’s no other way to value cryptocurrencies than the ‘biggest fool theory’ – the hope that a bigger fool will pay you more than you paid,” says Johnson .
2. Bitcoin is highly speculative and risky
This lack of fundamental value makes Bitcoin highly speculative and risky, and the price is determined solely by sentiment, as there is no inherent value in the cryptocurrency.
“It’s still an extremely speculative investment with a level of risk far beyond what most people are willing to take,” says Josh Simpson, investment adviser at Lake Advisory Group in Lady Lake, Florida. “It’s like playing the game at this point.”
“I can think of few worse strategies than committing retirement funds to tax-advantaged accounts in cryptocurrencies,” Johnson says. “‘Investing’ in bitcoin and other cryptocurrencies is pure speculation,” he says, putting the word invest in air quotes.
“I still don’t believe it makes sense for the average investor or individual with a 401(k) to have cryptocurrency in their retirement accounts,” Simpson says.
3. Many serious investors are skeptical about Bitcoin
In addition to these fundamental issues – and because of them – Bitcoin and other cryptocurrencies are scoffed at by many serious investors, including many of the most respected.
Legendary investor Warren Buffett, director of Berkshire Hathaway, said he was not interested in Bitcoin because it is not a productive asset.
At Berkshire Hathaway’s 2022 shareholder meeting, he said, “Now if you told me you own all the bitcoin in the world and offered it to me for $25, I wouldn’t take it because what would I do with it? I should sell it to you one way or another. It won’t do anything. “
Johnson quotes Buffett’s business partner, Charlie Munger, who said of crypto, “To me, it’s just insanity. It’s like someone else swapping poop and you decide you can’t be left out.
Ask yourself these questions before deciding if Bitcoin is suitable for your 401(k)
If you’re still interested in buying cryptocurrency, ask yourself a few questions to see if it makes sense for you and your situation. Simpson offers three questions he thinks the general public should ask before getting into the crypto market.
- Why am I thinking of putting my money in this? “Is it just because that’s what the media tells me everyone else is doing,” Simpson says. “You would think that as recently as the Bernie Madoff affair was, people would be more wary of ‘get-rich-quick’ schemes. We all hear about people who have made millions on cryptocurrencies. What we don’t hear about are the thousands of other people who went bankrupt.
- Do I have the risk tolerance to invest in it? “We’ve all seen the wild swings in value that cryptocurrency goes through, sometimes on a daily basis,” he says. “As an investor, can you really stand to see your account value go up 50% this week and go down 50% the week after?”
- Do I understand what I’m investing in? “Most people have no idea how cryptocurrency works, what it is worth, and who uses it,” Simpson says. “Follow Warren Buffett’s advice, never invest in anything you don’t understand.”
Even beyond these questions, you should consider how crypto fits into your retirement portfolio. The vast majority of Americans should avoid risky investments and stick to proven methods of wealth generation, says Chris Barnes, chief commercial officer of Escalent, a people-knowledge company.
“Most are already behind on saving for retirement and trying to use cryptocurrency as a way to catch up will likely result in more losses than gains,” Barnes says. “The truth is that the traditional, methodical, and admittedly boring ways of saving money for retirement are the most effective — not cryptocurrencies.”
More Companies Likely to Offer Crypto in 401(k)
With Fidelity switching to Bitcoin for 401(k)s, industry watchers expect other pension companies to follow suit, at least for now.
“Because such a big player in the 401(k) market has taken the plunge, I’m confident we’ll see more providers push toward this offering,” says Faron Daugs, CFP, Wealth Advisor, Founder and CEO of Harrison Wallace. . Financial Group in the greater Chicago area.
“It’s a great way for Fidelity to show that it’s a responsive, forward-thinking brand that wants to meet popular customer demand,” Barnes said. “For these reasons, many of Fidelity’s competitors are likely to follow suit shortly. That said, I expect at least one brand to buck this trend and use their position against cryptocurrencies in the 401(k) as a differentiator.
“For the industry, this means other 401(k) providers will have to find a way to offer this option to their investors to stay competitive,” Simpson says. “I don’t know if there will be more of a push for crypto access in 401(k) plans, but it will take a lot more oversight, regulation, and education about the crypto industry. “
Regulators Still Skeptical of Crypto
As Fidelity Investments is poised to become the first major retirement fund company to allow participants to hold Bitcoin in 401(k) accounts, the company and the industry as a whole could still feel the pushback from government regulators. moving.
In March, the US Department of Labor, which regulates company-sponsored schemes, advised companies to “exercise extreme caution” before allowing employees to invest in cryptocurrency under schemes. of retirement.
“I am confident that Fidelity did extensive research before making the decision to allow crypto purchases within its 401(k) platform,” Daugs said. “However, there could be some potential pushback, particularly from regulators, due to the highly speculative nature of cryptocurrency.”
Regulators have a number of different steps they could take to slow the rollout of cryptocurrency into pension plans or eliminate it entirely.
“Government and regulators could slow this expansion by increasing the regulatory burden on these different cryptocurrencies,” Simpson says. “By forcing these investment options to be more transparent about their users, the number of coins in existence, and how they are traded or held, this could have a significant negative impact on their value, given that the heaviest users of cryptocurrencies in the world are criminal organizations.”
Or regulators could work even more directly to prevent 401(k) accounts from buying cryptocurrency.
“They could take a heavy-handed approach and outright ban cryptocurrencies from 401(k)s or tax-deferred accounts more broadly based on the likelihood of them creating bubbles or dangerous liabilities,” Barnes says. “Whether or not they choose to go down this route will likely depend on the broader politics at play with respect to cryptocurrency regulation, which is far from fully materializing.”
But whatever regulators do, individuals are in the best position to protect themselves, because they are able to make sensible decisions about what to own and what not to own.
“I believe that truly understanding what you own and why you own it is vitally important in any investment,” says Daugs. “As an investor and adviser, I think it’s extremely important to educate yourself on what you own, why you own it, and to understand all of the potential risks of this investment you are considering for your portfolio.”
At the end of the line
Although Fidelity Investments has edged out other big rivals in allowing bitcoin in its 401(k) accounts, that doesn’t mean you have to invest in it, if the opportunity arises. Instead, experts recommend sticking to a proven way to build wealth – buy and hold a well-diversified portfolio of high-quality investments, then add to your portfolio over time. A great way to do this is to buy an index fund based on the S&P 500, which is available at low cost and has an enviable track record of returns over time.