Sound financial planning or gambling with the future?

In April, United States-based retirement plan provider Fidelity Investments allowed 401(k) retirement savings account holders to directly invest in its flagship cryptocurrency, Bitcoin (BTC), making crypto a potential part of one’s savings for the future.

The 401(k) is a retirement savings plan offered by many U.S. employers that provides tax benefits to savers and allows for several different investment options. Fidelity’s move will make it easier for Bitcoin to be among these options.

In a typical 401(k) plan, employers typically match some or all of the employee’s contributions, while employees agree to receive a percentage of each paycheck paid directly into an investment account created for the plan.

Fidelity is the largest provider of retirement plans in the United States, and the launch of BTC will make the cryptocurrency available to over 40 million employees – assuming their employers decide to offer it. Investors benefiting from the initiative can become tax-advantaged long-term BTC holders who remove coins from circulation each month.

The company’s plan limits BTC allocations to a maximum of 20%, allowing companies to lower the threshold even further. But offering cryptocurrency options for 401(k)s is not new. In June 2021, another retirement plan provider, ForUsAll, partnered with Coinbase to offer account holders exposure to BTC.

ForUsAll recently filed a lawsuit in the United States District Court for the District of Columbia against the Department of Labor and Secretary of Labor Marty Walsh, seeking the withdrawal of a compliance aid publication.

The publication states that the department will “conduct a targeted research program” of the Employee Benefits Security Administration’s 401(k) plans involving cryptocurrency. Speaking to Cointelegraph at the time, ForUsAll CEO Jeff Schulte said the government was “trying to restrict the types of investments Americans can choose to make today because they decide they don’t like a particular asset class.”

Government overkill questions aside, it’s also important to consider whether it’s a good idea to include crypto assets in a retirement plan. The Bitcoin network has been around for over a decade and has so far outperformed any other asset class, but as any analyst would say, past performance does not guarantee future results.

Crypto volatility and 401(k) plans

Some investors may find digital currencies too risky, given that Bitcoin and crypto assets are generally new financial experiments that are a little over a decade old. Cryptocurrencies can be quite volatile and their value has been known to drop by up to 80% in bear markets – which can be disastrous before someone retires.

While employees aren’t forced to withdraw from their 401(k) plans when they retire, the purpose of having the money there is to provide them comfort during the sunset years. Waiting for the market to recover or accepting such significant losses can be devastating.

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Chris Kline, co-founder and chief operating officer of Bitcoin IRA, a crypto-focused individual retirement account provider, told Cointelegraph that there is “a growing debate about digital asset adoption and growing use cases.”

Kline pointed to Senator Tommy Tuberville of Alabama, who recently unveiled the Financial Freedom Act, a bill that would allow Americans to add cryptocurrency to their 401(k) retirement savings plans.

According to Kline, it is “part of the pension crisis” we are experiencing in this country. [the U.S.] It is due to a lack of participation in 401(k)s.” He added that such moves could be a way to engage the next generation with their employer-sponsored plans and help Americans retire while witnessing the resilience and affordability of crypto assets. Kline added:

“Crypto is certainly volatile, but its flexibility and relevance in its short existence is remarkable. Having at least some exposure and, more importantly, experience in the crypto space becomes crucial to modern investing.”

Kline stated that cryptocurrencies can have a devastating effect on money, which the Internet has in communication or e-mail in post offices.

Speaking to Cointelegraph, Scott Melker, a cryptocurrency influencer, said: Wolves of All Streets PodcastHe noted that every investor should have “at least minimal exposure” to Bitcoin, with Ether (ETH) a notable second possibility.

Even a small allocation in these assets potentially presents “special risk and opportunity to invest in an asset,” according to Melker. [that] everything can rise as it falls.” Melker added that crypto markets crashing ahead of retirement may not be the top concern:

“Any market could crash before retirement, so this is not a Bitcoin-specific concern. Currently, investors in tech stocks are massively underperforming in their retirement accounts.”

Adding that investors should be allowed to invest in any asset they choose for their retirement, Melker concluded that while self-directed IRAs are “so popular,” 401(k) holders do not yet have such an option.

A volatile asset class for diversified portfolios

Over the last few years, more and more people have come to view cryptocurrencies as an investable asset class, and the demand for retirement savings is clearly present. In a survey conducted by Investopedia, one in four millennials reported that they are already using crypto to fund their retirement goals.

But employers still have their doubts. The Plan Sponsor Council of America recently surveyed its members, who are employers who sponsor qualified savings plans, and asked if they are considering adding crypto to their investment options. Only 1.6% responded positively.

A statue of a bear and a bull on a seesaw representing changing markets, in front of the office of Fross and Fross Wealth Management in The Villages, Florida. Source: Whoisjohngalt.

Speaking to Cointelegraph, Daniel Strachman, managing partner of A&C Advisors and an independent trustee of Arca US Treasury Fund, said cryptocurrencies are still “something a diversified portfolio should include.”

According to Strachman, an individual’s level of exposure to crypto assets should depend on several factors, including age, income, other assets, and more. It’s all about investor education, he says, because “it must have important information, content, and educational programs for investors, regardless of the size of their holdings.”

Cameron Collins, an investment analyst at Viridi Funds, which offers crypto and clean energy investment solutions, echoed Strachman. He told Cointelegraph that solid cryptocurrencies like Bitcoin “are great investments and deserve to be included in his 401(k) plans.”

According to Collins, “non-fundamental” memecoins and fraudulent tokens do not deserve to be involved in such investments, and policymakers – along with investors and plan managers – should be made aware of this important warning.

He said cryptocurrencies offer “extreme upside potential” but lack investor protection, which could be a significant downside. However, upside potential may be all an investor needs.

Giving prudent managers more opportunities

Having more options to invest in different assets, including cryptocurrencies, “more opportunities to optimize this long-term rate of return,” according to Thomas Perfumo, head of business operations and strategy at crypto exchange Kraken. can give.

Speaking to Cointelegraph, Perfumo said that retirement is often associated with low risk, but at an 8% rate over 30 years, $1 will exceed $10 and that same $1 will exceed $1 compounded over 30 years. He stated that the method missed the market”. A 6% increase to $5.74.

According to Perfumo, optimizing this rate of return over the long run is “how an individual builds wealth, overcomes the burden of inflation, and eventually accrues enough to retire comfortably.”

Perfumo says, “Risk tolerance develops throughout a person’s life. Someone closer to retirement who may already have substantial savings will likely make a lower allocation to risky investments like cryptocurrency.

Conversely, individuals at the beginning of their careers “have greater risk-taking capacity and will likely allocate more of their capital to assets at risk,” he added.

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Perfumo said the potential downsides of adding cryptocurrencies to their retirement investment plans include trustees who “do not act in the best interests of their clients by rushing into a risky product or mis-allocating clients’ capital based on their risk profile.”

On the other hand, someone who wants to manage a self-managed retirement portfolio “should have all available options, as long as they are informed about the risks.”

Adding cryptocurrencies to 401(k) plans means adding tax-efficient investment opportunities for investors looking to hold their assets for the long haul. As with any other financial decision, the choice should be tailored to the risk profiles of investors and should only be made after extensive research and, if necessary, assistance from advisors.

Cryptocurrency investments do not and should not fit everyone’s risk profile. They are volunteers, but can be highly beneficial to investors who fully understand the risks involved.