In a recent blog post, the U.S. Department of Labor (DoL) expressed concern that some 401(k) plans are considering adding cryptocurrencies and other digital assets to their investment menus. Here's the quote:
At this early stage in the history of cryptocurrencies, however, the U.S. Department of Labor has serious concerns about plans' decisions to expose participants to direct investments in cryptocurrencies or related products, such as NFTs, coins, and crypto assets.
Read on for a breakdown of why the DoL is worried about crypto in your 401(k) -- and what you can do about it.
DoL: Crypto is too risky for retirement
The DoL's high-level view is that crypto assets are inappropriately risky for retirement savings. The agency cites four factors that contribute to the risk:
- Uncertain value. Crypto assets aren't subject to the same reporting requirements as public stocks. That makes their value harder to determine, which can leave investors more vulnerable to scams and big losses.
- High risk level, especially for novice investors. A 401(k) plan participant may assume crypto assets are safer than they are simply because they're included on a retirement plan's investment menu.
- Volatile pricing. Crypto assets can change value quickly. Double-digit losses in a single day are possible.
- Unknown regulatory future. New regulation in the U.S. and around the world could alter the long-term investment potential of crypto assets.
In sum, the DoL's concern is that you'll invest your retirement savings in crypto, which creates the potential for large losses and insolvency in your senior years.
Wood and Cuban: Crypto has long-term potential
It's fair to say these digital assets are volatile and face an uncertain future. Even so, some well-regarded investors believe the crypto economy will deliver big payoffs.
Cathie Wood, founder of investment management firm Ark Invest, has predicted Bitcoin (BTC -0.09%) will rise tenfold to $500,000 by 2026. Shark Tank investor Mark Cuban has said most of his new investments outside of the reality TV series are in the crypto space.
When crypto fits in your portfolio
The DoL's evolving stance on crypto may keep digital currencies off your 401(k) investment menu, but it doesn't prevent you from investing in crypto elsewhere. If you're interested in crypto investing, first ask yourself if you have the stomach for it.
Bitcoin and other cryptocurrencies might fit into your portfolio if:
- You can handle wild volatility.
- You believe in the value proposition of a secure, decentralized monetary system.
- You have enough liquidity to cover your cash needs for the next three to six months. If you don't, consider putting your money toward an emergency fund instead.
- You are interested in following the ongoing developments in the crypto economy.
- You are already investing in traditional assets. Crypto generally should comprise a low percentage of your overall portfolio -- say 3% to 5%.
Crypto and your retirement
The DoL's concerns about crypto are not unfounded. Although crypto is fast becoming a mainstream topic of conversation, it is a speculative and confusing asset class. That's why it's not suitable as a core retirement holding for most people.
Still, crypto may have a role to play in your long-term financial plan outside your 401(k). If you do step into crypto investing, do it gently to start. You can always increase your activity later as you get comfortable with how these assets behave.