Crypto in Your 401(k)?  Hmmm . . . Not So “Fast”!

A Bitcoin covered in black crystals

As an adult, I’ve come to appreciate that there are certain things in life that are truly what I’d call a “young-man’s” game. Parenting, for one thing, is a fantastic example. Sleepless nights are not a thing for the old(er) and weary . . . Nor is catching my kid Phoebe in softball.  She is the starting pitcher for Falmouth and she is fast.  So fast that against New Bedford (a very good team) last week she tallied up 16 strikeouts in 7 innings of one-hit ball for the win.  That is over 2 strikeouts per inning as her proud father writes.  Well, before the game she asked me to warm her up.  Folks, that ball comes in so fast.  So, while her 16 year-old catcher catches with ease, her 54 year old father, well, not so easy.  One of her glove-snapping fast-balls hit me in the shoulder.  Trying to brush it off at the time to show my kid how tough her ol’man is, you can actually see the softball stiches engrained into my right shoulder.  

But you know what else is a young person’s game? In the world of finance, it’s risky investing. Things like speculative investments, alternative investments, private equity, and any investment where you’re taking on significant risk in the hopes of realizing great gains. As I’ve discussed here before, investing for retirement is a long game and the rules aren’t the same for everyone. For example, when you’re young and have decades before you need to start relying on your investments for income, you can take more risk with an accumulation strategy. If the markets don’t cooperate, you still have the time and opportunity for your portfolio to hopefully recover.

But once you get close to retirement, usually within 5-10 years, the rules change. It’s now that you need to focus more on preserving your wealth in a distribution strategy so that it can produce income for you in retirement. Any big losses now could be too great to weather because your portfolio has less time to recover. 

So when I read that Fidelity Investments, the biggest manager of 401(k) plans in the country, has announced that it will soon allow Bitcoin among the investible assets within its plan, I was somewhat surprised. Sure, this is probably terrific news for Bitcoin. But whether it is equally good news for 401(k) plans remains to be seen.

Why is this good for Bitcoin? Well, it lends some financial credibility to it. After all, if a large company like Fidelity is going to allow it in retirement plans, it must be OK, right? And, naturally, this move could easily increase the market for Bitcoin, whose only use seems to be to sell it to other people. After all, Fidelity handles the retirement accounts of 23,000 companies. Its clients have over $11 trillion in their accounts. That’s about 14 times the alleged value of all the Bitcoin in the world₁.

Not everyone thinks this is a good idea. Take the Department of Labor, which oversees employer-sponsored retirement plans. They have taken issue with Fidelity Investment’s decision to allow up to 20% of 401(k) accounts to be invested in Bitcoin, according to a recent report. The department has “grave concerns with what Fidelity has done,” Ali Khawar, acting assistant secretary of the Employee Benefits Security Administration, told the Wall Street Journal₂. 

Why the concern with Bitcoin in one’s retirement plan? Well, for starters, it doesn’t pay interest or dividends. It doesn’t earn income. It’s not better than cash, Apple Pay, Venmo, credit cards, debit cards and so on for buying stuff. It’s not even as good for money laundering as gold. In fact, the sole purpose of bitcoin is to make money by trading it. 

To me, the real issue is that it operates just like a Ponzi scheme. That doesn’t mean the price can’t keep going up. It could do so indefinitely. But it’s still just a Ponzi scheme. All the gains for existing investors come at the expense of new investors. The new money comes in, the old money cashes out. 

Now, most other investments have value because they produce income. Most stocks have value because they pay out dividends (or in some cases could if they wanted to). Those dividends come from profits, which in turn come from creating value — turning raw materials into tangible item. Bonds, too, have value, because they pay coupons, which also come out of earnings or taxes. As we’ve seen this year, commodities you can actually use — like oil and gas — have intrinsic value. Just what intrinsic value does Bitcoin have? I have yet to hear a logical explanation. 

So, just why is Fidelity making this move. The short answer: Because the customers want it. Bitcoin and other cryptocurrencies may be getting more popular with investors, but they’re still extremely volatile investments. But because there’s so much “hype” around these assets, some folks feel like they need to invest in them or be “left behind,” Khawar told the Journal. 

In fact, in March of this year, the Labor Department issued a warning to employers about allowing cryptocurrency investment via retirement accounts. It’s likely that the department will apply pressure for that number to be lower, perhaps below 5%. But whatever the permitted amount, you need to review your own situation carefully to determine if it has any place at all in your plan. Remember, we don’t look at any investment as good or bad, only appropriate or not.  So if you are nearing retirement, you need to ensure your plan incorporates downside risk mitigation before turning an eye towards this risky – and perhaps a young person’s – investment. 

As for Phoebe, well I gave in, I am now wearing a chest protector and helmut.

And as always – be vigilant and stay alert, because you deserve more!

Have a great week.

Jeff Cutter, CPA/PFS offers investment advisory services through Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield. Jeff can be reached at 

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