• Sat. May 21st, 2022

Bitcoin in your 401(k)? Not so fast, say financial advisors

ByHazel R. Lang

May 5, 2022

Millions of retirement savers may soon be able to invest in Bitcoin as easily as they now buy stocks and bonds, following an announcement last week from Fidelity Investments, the largest provider of nation’s pension plans that it will add cryptocurrency as an option to the 401(k) plans it offers businesses later this year.

“This will be remembered as a watershed moment in the evolution of crypto,” says financial advisor Ric Edelman, founder of the Digital Assets Council of Financial Professionals and author of The truth about crypto. “For the average American worker, the only place to save for retirement is a company retirement plan. Millions of workers will now start buying Bitcoin that otherwise never could.”

Just because you can buy cryptocurrency into your retirement plan, whether in the future through your 401(k) or currently through an IRA, doesn’t mean you should. While investing in Bitcoin, Ethereum and other digital currencies can help diversify your savings and potentially protect against inflation and boost overall returns, financial advisers say nothing more than a small stake is too risky for a long-term goal like retirement given how wild the price swings can be.

The trick is to find that sweet spot.

Even before Fidelity’s decision to add Bitcoin to its 401(k) menu, interest in investing in crypto for retirement had risen sharply, especially among younger savers. A survey last month by Investopedia, for example, found that one in four millennials say they rely on crypto to fund their retirement.

If you’re one of those looking to add digital currencies to your long-term savings, here’s what you need to know to get the most out of your investment without blowing your chances of a comfortable retirement.

An employee demonstrates how the Bitcoin ATM works at the BitBase Store on August 9, 2021 in Palma de Mallorca, Spain. (Photo by Carlos Alvarez/Getty Images)
Carlos Alvarez/Getty Images

Expect turbulence

Only a quarter of Americans believe they have a solid knowledge of digital assets, like cryptocurrencies, and even fewer (16%) have actually invested in or used digital assets before, according to surveys from Investopedia and the Pew Research Center, respectively. . This misunderstanding was a key reason the Department of Labor warned the pension industry in March to exercise extreme caution when offering crypto investment opportunities, as Fidelity will do. because inexperienced investors will likely underestimate how volatile it is.

On the investment firm’s decision to offer Bitcoin to the 23,000 businesses that rely on its pension services, Ali Khawar, Acting Deputy Secretary of the DOL’s Employee Benefits Security Administration, flatly told the the wall street journal“We are very concerned about what Fidelity has done.”

How volatile is crypto? Over the past year, Bitcoin has plunged 10% or more in a single day on five occasions. In contrast, the stock market, as measured by the S&P 500, has only fallen as far and as fast twice in 50 years. The ride has been all downhill recently: Bitcoin has fallen over 40% since hitting a record high of $69,000 last November.

However, the potential rewards for those with the stomach to hang on to the roller coaster can be significant. If you had invested five years ago, when Bitcoin was valued at around $1,500, for example, you would enjoy a 2,400% gain today. Shares over the same period rose 120% – still a substantial increase, but nothing close to the murder that investors who timed their crypto purchases perfectly might have done.

The volatile nature of bitcoin and other crypto assets is to be expected of an investment whose value is largely determined by what others think it is worth relative to any intrinsic value, experts say.

“Returns are based purely on speculation in the hope that a future buyer is willing to pay a higher price than your purchase price,” says financial adviser Rob Greenman, chief growth officer at Vista Capital Partners. While all investing involves this expectation, assets such as stocks, bonds, and real estate generate income streams such as interest, dividends, and profits and are backed by physical assets or government.

The Crypto’s short history also means that there is little past data to use to predict its movements, especially in response to different economic environments. This includes current conditions, where interest rates are rising and inflation is high.

So, if you are considering investing in crypto, you must be prepared to suddenly lose a potentially large sum of your money, which is why advisors warn you to treat this as a speculative investment. Only put in what you can financially and emotionally handle.

Mix it up

Nearly half of financial advisors own Bitcoin, Edelman says. They don’t buy it because they expect to reap big gains when they finally sell. Some advisors see it instead as a way to reduce the overall risk of their investment portfolio, despite the volatility of crypto.

This is because cryptocurrency prices have generally not moved in parallel with changes in the value of stocks, bonds or other assets over their short history, making them a useful tool for further diversifying stocks. investments in a retirement portfolio.

“They don’t behave the same as stocks, bonds, gold or commodities, so adding them to your investment mix can increase return and reduce risk,” says financial adviser Jim Shagawat, partner of AdvicePeriod.

The potential to dramatically increase your overall earnings can also be high, if the timing is right for you, Shagawat says. In a typical retirement account with a balance of 60% stocks and 40% bonds, the average one-year return is about 7%. If you allocate 1% of the equity portion of your savings to digital assets like crypto, “and there’s a wave, like when Bitcoin went up 1,500%, the one-year total return is 22 %,” says Shagawat. “Can it go to zero, a total loss? It’s possible, but with the asset mix at 59/40/1, the one-year return is 6%.”

crypto to 401(k)s bitcoin
A visual representation of the digital cryptocurrency, Bitcoin. The price of a Bitcoin today is around $39,000, around 40% below its November 2021 high of $69,000.
Dan Kitwood/Getty Images

Of course, the low correlation of crypto to stocks and bonds is not fully tested. Crypto has a short history compared to stocks and bonds, and in recent months it has moved in the same direction as other assets as concerns about rising interest rates and inflation have increased.

Investing in Bitcoin or other digital assets through a 401(k) or retirement account can also be helpful in mitigating some of the volatility inherent in crypto. If you are eager to invest in crypto at a high level only to see it crash tomorrow, buying small amounts at regular intervals with your pension contributions can be a smart way to reduce risk. Because you will buy it at a high price some weeks and at a lower price at other times, the cost will even out over time, meaning you will feel the waves less.

Add in a small measure

While Fidelity will allow people enrolled in its 401(k) plans to transfer up to 20% of their retirement savings into Bitcoin and also divert 20% of future contributions into the currency, no expert who Newsweek spoke with supported staking such a large chunk of your savings on crypto.

Instead, many recommended much smaller positions, between 1-2.5% of the total amount you invest. At most, Edelman suggests investing 5% of your total savings in crypto, assuming you add it to an otherwise well-diversified portfolio and intend to hold the investment for at least five years.

“The whole idea of ​​diversification is that you want to do a little bit of a lot of different things,” says Edelman. “With a 1% allocation, you are not going to hurt yourself if Bitcoin goes bankrupt and it can improve your return. The risk/reward ratio is very good.”

Whether you should make 1% or 5%, or forget about investing in crypto altogether, depends on your tolerance for risk, your ability to withstand a loss, and whether you will periodically rebalance your investments i.e. sell some of your winners and buy more laggards to maintain your recommended asset mix – should a huge bitcoin gain or loss throw your account haywire.

Determining where you fall on this scale is actually quite simple. If you are more conservative, invest less or don’t buy crypto at all. More aggressive in nature and unlikely to lose sleep or, even worse, sell during the occasional and inevitable deep drop in digital currency prices? Then you can invest more towards the higher end of the suggested range.

As with any investment, trying to time your get-rich crypto purchases perfectly probably won’t work. And that’s especially true when it comes to long-term savings accounts like a 401(k). If you’re looking to make a killing, a retirement plan designed to fund your old age isn’t the place to do it.

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