Since 2022, some companies have offered participants the option of investing in cryptocurrencies through their 401(k) plan. That means employees have been able to diversify their holdings by adding Bitcoin (BTC 1.83%) to their portfolios. The question becomes: Is it a good idea? Is it wise to bank on Bitcoin (and other cryptocurrencies) to fund your retirement?
At this point, there is not enough historical data to confidently say one way or the other. However, cryptocurrency is unlike any other investment, and there are enough red flags to give even the most experienced investor pause.
Here are seven of those red flags.
Image source: Getty Images.
1. Volatility
Bitcoin is famous for price volatility. While all investments carry risks, an analysis from the Government Accountability Office (GAO) shows that investing in crypto assets is "uniquely volatile."
The price volatility that is part and parcel of cryptocurrencies like Bitcoin can lead to large fluctuations in the value of your 401(k), a fact that may not be ideal if you seek stability.
2. Inadequate history
Bitcoin is a relatively new player on the scene. The lack of long-term performance compared to the longer history of the stock market makes measuring Bitcoin's risk/reward profile difficult. If 401(k) plans continue to offer cryptocurrency options, it could take years to fully understand Bitcoin's risk/reward profile. If you're on the fence about Bitcoin, your best move may be to give analysts time to figure out just how much risk you're taking before including it in your 401(k).
3. Custodial challenges
Managing your Bitcoin typically requires extremely secure storage, like Bitcoin wallets. Unless your 401(k) plan provides a safe and reliable way to manage your digital assets, you may face security risks. Before adding Bitcoin to your 401(k) plan, be sure you fully understand the steps taken to protect your investment.
4. Withdrawal hurdles
401(k) plans typically impose strict rules regarding withdrawals and distributions. Imagine that the value of your Bitcoin rises dramatically, and you want to withdraw the profits. You may be unable to access your gains without getting penalized.
5. Expenses
While fees vary according to the 401(k) plan, some charge higher fees to those who include Bitcoin (and other cryptocurrencies) in their portfolios. These fees can eat into your potential returns over time.
6. Evolving regulations
As of today, cryptocurrency in 401(k)s is regulated like any other retirement investment. However, given its volatility, it's unlike most investments, and cryptocurrency regulations are just beginning to emerge. As regulators play catch-up, the value and legality of Bitcoin investments could be impacted, a fact that creates uncertainty among investors.
7. Complexity
Some people are well versed in Bitcoin and its role in their finances. However, if that's not you and you're unfamiliar with the peculiar complexities of cryptocurrency, it's possible to make uninformed decisions that cost you money.
People may one day laugh at current cryptocurrency concerns, and it's entirely possible that Bitcoin will eventually become a staple of 401(k)s. But until that day comes, you may want to weigh the pros and cons of including Bitcoin in your retirement account.
