Sound financial planning or gambling with the future?

In April, U.S.-based retirement plan provider Fidelity Investments went on to allow 401 (k) retirement savings account holders to invest directly in Bitcoin (BTC), the flagship cryptocurrency. cryptography in a potential part of the savings for the future.

A 401 (k) is a retirement savings plan offered by many American business owners that offer tax benefits to the saver and allow for several different investment options. The Fidelity move will make it easier for Bitcoin to be among those options.

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

Fidelity is the largest provider of retirement plans in the United States, and its launch of BTC will make the cryptocurrency available to more than 40 million employees, assuming its employees decide to offer it. Investors who take advantage of the initiative could effectively become long-term BTC hodlers with tax advantages that remove coins from circulation each month.

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

ForUsAll even recently filed a lawsuit against the Department of Labor and Secretary of Labor Marty Walsh in the U.S. District Court for the District of Columbia, requesting the withdrawal of a compliance assistance release.

The statement said the department’s Employee Benefits Security Administration “will conduct a research program aimed at” 401 (k) plans that include cryptocurrency. Speaking to Cointelegraph at the time, ForUsAll CEO Jeff Schulte said the government was “trying to restrict the type of investment Americans can choose because today they have decided they don’t like a certain class of assets.”

Aside from questions about the scope of government, it is also important to consider whether including cryptographic assets in a retirement plan is a good idea. The Bitcoin network has been around for more than a decade and has surpassed all other asset classes so far, but as any analyst will say, past performance does not guarantee future results.

Cryptographic volatility and 401 (k) plans.

Given that Bitcoin and cryptocurrencies in general are recent financial experiments of just over a decade, some investors may find digital currencies too risky. Cryptocurrencies can be very volatile and their value is known to fall by as much as 80% during bear markets, which could be disastrous before someone retires.

While employees are not required to withdraw from their 401 (k) plans when they retire, the goal of the money being there is to provide them with comfort during their twilight years. Waiting for the market to recover or simply accepting such significant losses can be devastating.

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Chris Kline, co-founder and chief operating officer of Bitcoin IRA, a provider of individual retirement accounts focused on cryptocurrencies, told Cointelegraph that there is a “growing conversation about the adoption of digital assets and their growing use case.”

Kline pointed to Sen. Tommy Tuberville of Alabama, who recently introduced a bill, the Financial Freedom Act, that seeks to allow Americans to add cryptocurrencies to their 401 (k) retirement savings plans.

According to Kline, part of the “retirement crisis we have in this country [the U.S.] He added that such moves could be a way to engage new generations through their business-sponsored plans and help Americans retire while witnessing the resilience and relevance of cryptographic assets. Kline added:

“Crypto is certainly volatile, but its resilience and relevance in its short existence are remarkable. Having at least some exposure, and more importantly, experience in cryptocurrencies, is becoming paramount to modern investment.

Cryptocurrencies could have the same disruptive impact on money that the Internet has had on communications or that email has had on post offices, Kline said.

Speaking to Cointelegraph, Scott Melker, a cryptocurrency influencer and host of the Wolf Of All Streets podcastnoted that every investor should have “at least minimal exposure” to Bitcoin, with Ether (ETH) being a second possibility worth considering.

According to Melker, even a small allocation in these assets offers potentially “idiosyncratic risk and the opportunity to invest in an asset.” [that] it can go up when everything else is falling. ”Melker added that cryptocurrency markets falling before retirement may not be the biggest concern, saying:

“Any market can fail before retirement, so this is not a specific concern for Bitcoin. Investments in technology stocks right now are performing much lower than cryptography on their retirement accounts.

Melker added that investors should be able to invest in any asset they prefer for retirement, and concluded that while self-directed IRAs are “popular for this reason,” 401 (k) holders have not yet had such an option.

A class of volatile assets for diversified portfolios

In recent years, more and more people have considered cryptocurrencies to be a class of investable assets, with a clearly present demand for retirement savings. In a survey conducted by Investopedia, one in four millennial respondents reported that they are already using crypto to help fund their retirement goals.

Entrepreneurs, however, still have their doubts. The Plan Sponsor Council of America conducted a survey of its members, who are entrepreneurs who sponsor qualified savings plans, and asked if they are considering adding cryptocurrencies to their investment options. Only 1.6% answered in the affirmative.

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

Speaking to Cointelegraph, Daniel Strachman, managing partner of A&C Advisors and independent director of the Ark US Treasury Fund, said cryptocurrencies are “something that should include a diversified portfolio.”

According to Strachman, an individual’s level of exposure to cryptographic assets should depend on a number of factors, including age, income, other assets, and more. For him, this is “all investor education,” as “there needs to be important information, content, and educational programs available to investors, regardless of the size of their assets.”

Cameron Collins, an investment analyst at Viridi Funds, a company that offers investment solutions in cryptography and clean energy, echoed Strachman. He told Cointelegraph that solid cryptocurrencies like Bitcoin “are great investments and deserve a place in the 401 (k) plans.”

According to Collins, memecoins and scam tokens without “core value” do not deserve a place in this type of investment, and policymakers, along with investors and plan managers, should be aware of this important warning.

Cryptocurrencies, he said, offer “extreme upside potential,” but lack protection for investors, which can be a major drawback. However, the upside potential may be all that an investor needs.

Give more opportunities to prudent managers

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

Speaking to Cointelegraph, Perfume noted that retirement is often associated with low risk, but “This heuristic loses the market,” as a combination of $ 1 for 30 years at a rate of 8% will grow to over $ 10, while that even consisting of $ 1 for 30 years. a 6% rate goes up to $ 5.74.

According to Perfume, optimizing that long-term rate of return is “how an individual builds wealth, overcomes the burden of inflation, and ultimately accumulates enough to retire comfortably.”

Perfumo added: “Risk tolerance evolves over a person’s lifetime. Someone closer to retirement, who may already have a significant amount of savings, will likely have a lower allocation for risky investments such as cryptocurrency.

He added that by contrast, individuals at the beginning of their careers have “more ability to take risks and are likely to spend more of their capital on risky assets.”

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The potential drawbacks of adding cryptocurrencies to retirement investment plans, Perfumo said, imply that trustees do not “act in the best interests of their clients by rushing to a risky product or misallocating their clients’ capital in relation to their risk profiles.” .

On the other hand, anyone who wants to manage a self-directed retirement portfolio “should have all the options available to them, as long as they are aware of the risks.”

Adding cryptocurrencies to 401 (k) plans means adding tax-efficient investment opportunities for investors looking to keep their assets for an extended period of time. As with any other financial decision, the choice should be tailored to the risk profiles of investors and should only be made after a thorough investigation and with the help of advisors if necessary.

Investments in cryptocurrencies do not match everyone’s risk profile, nor should they. They are voluntary, but can be very beneficial for investors who thoroughly understand the risks involved.