Please Do Not 401(K) Bids in Bitcoin
Fidelity announced Tuesday that it will allow workers to put up to 20% of their savings and 401(k) contributions directly into bitcoin. This will make Fidelity the first company in the financial services industry to allow this service without having to go through a separate brokerage window, taking us to the next level of retirement savings plans. But are all new frontiers… good frontiers?
Last month, the US Department of Labor released a statement warning people against investing their retirement funds in volatile digital currencies. They explain: “The retirement savings of American workers and their families represent years of hard work and sacrifice… However, at this early stage in the history of cryptocurrencies, the US Department of Labor is seriously concerned about the decisions of [pension] plans to expose participants to direct investments in cryptocurrencies.”
At first glance, the appeal of investing part of your 401(k) in cryptocurrency is simple – you can make a lot of money in a short period of time. In fact, the success of crypto companies depends on this attraction; if you don’t buy now, you will be left behind. They throw top list celebrities like LeBron James and Matt Damon at you and tell you to get on board because the train is about to leave the station. They spend tons of money spreading the message, including at least $26 million in Super Bowl advertising .
What is conveniently not included in their promotional campaign is the risk you take when investing in cryptocurrencies. What is the downside of making big money in a short amount of time? This is the loss of a lot of money in a short period of time. The Department of Labor has outlined four reasons why cryptocurrency poses a risk to your retirement savings:
- Estimation problems. Financial experts have fundamental disagreements and concerns about how to value cryptocurrencies. These concerns are exacerbated by the fact that cryptocurrencies are generally not subject to the same reporting and data integrity requirements that apply to more traditional investment products. The scammers used misleading information to inflate the prices of cryptocurrencies and then sold their assets for profit before the value of the currency plummeted.
- Obstacles to making informed decisions. These investments can easily attract investments from inexperienced plan participants who expect high returns and little understanding of the risks that the investment presents. It can be very difficult for ordinary investors to distinguish fact from hype. When fiduciaries enable the cryptocurrency option on the 401(k) plan menu, it signals to participants that knowledgeable investment experts have approved it as a reasonable option. This can mislead participants about the risks and lead to large losses.
- Prices can change quickly and dramatically. Cryptocurrency prices have been extremely volatile. For example, in just one day last December, the price of bitcoin fell by more than 17 percent. These large fluctuations can leave participants vulnerable to significant losses.
- The evolving regulatory landscape . Laws and regulations are evolving rapidly. For example, a recent executive order directs federal agencies to study the risks and political approaches to digital assets, including cryptocurrencies. Changes in the US and around the world may affect the current regulatory framework.
I am not here to tell you not to invest in cryptocurrencies at all. You’re an adult, it’s your money, do what you want. I just want to kindly remind you that “volatility” is not usually the word you want to associate with your long-term investments. As long as cryptocurrency still exists in a largely unregulated market, it’s safest to stay away from it when you’re using money you can’t afford to lose.