Bitcoin In Your 401(k)? Here's What To Consider Before Deciding If It’s Right For You


Fidelity Investments recently announced that it’s planning to allow investors to purchase Bitcoin through their 401(k) retirement plans. Starting later this year, workers may have the choice to buy the cryptocurrency, but only if their employer uses Fidelity for their plan and allows the option to do so.

Investors would be able to add as much as 20 percent of their 401(k) balance to the digital currency, according to Fidelity, though individual employers may restrict this to a lower percentage for their workers.

The ability to invest in Bitcoin or other cryptocurrencies has been almost non-existent in 401(k) plans so far. That makes the move by Fidelity – one of the country’s largest retirement plan providers – such a watershed moment for the nascent crypto industry. It also comes amid a period of increasing regulatory openness to investing 401(k) plans in high-risk alternative assets.

With the possibility that Bitcoin may be available in your 401(k) plan in the near future, here’s what you should know about investing in crypto and why many experts say to stay away from it.

3 things to consider before adding Bitcoin to your retirement savings

Here are three things that experts say you should know about Bitcoin before you even think about putting your hard-earned money into this cryptocurrency or any other.

1. Bitcoin is not backed by anything

The price of Bitcoin has run up in recent years, after starting from nothing, and that may have given the impression that there’s some underlying value to the cryptocurrency. But it’s absolutely vital to understand that Bitcoin is not backed by anything at all, unlike stocks or bonds.

When investors buy a stock, they have a fractional ownership interest in a business. Over time the stock will rise and fall according to how well that underlying business performs. So, highly successful businesses such as Amazon will have stock that rises significantly in price over time. In other words, the stock is backed by the assets and cash flow of that underlying company.

In the case of Bitcoin, there’s nothing behind it – no assets or cash flow that backstop its value.

“There is no rational or fundamental way to determine the value of Bitcoin or any of the other various cryptocurrencies, as one can’t apply the tools of traditional finance to arrive at the intrinsic value (or true value) of the supposed asset,” says Robert R. Johnson, professor, Heider College of Business, Creighton University.

“There is no way to value cryptocurrencies other than the ‘greater fool theory’ – the hope that some greater fool will pay you more than you paid,” says Johnson.

2. Bitcoin is highly speculative and risky

This lack of any fundamental value makes Bitcoin highly speculative and risky, and the price is driven by sentiment alone, because there’s no inherent value to the cryptocurrency.

“It is still an extremely speculative investment with an amount of risk that is significantly more than most people are willing to take,” says Josh Simpson, investment advisor with Lake Advisory Group in Lady Lake, Florida. “It’s just like gambling at this point.”

“I can think of few worse strategies than committing retirement funds in tax-advantaged accounts to cryptocurrencies,” says Johnson. “‘Investing’ in bitcoin and other cryptocurrencies is pure, unadulterated speculation,” he says, putting the word investing in air quotes.

“I still don’t believe that it makes sense for the average investor or individual with a 401(k) to have cryptocurrency in their retirement accounts,” says Simpson.

3. Many serious investors are skeptical about Bitcoin

On top of these fundamental issues – and because of them – Bitcoin and other cryptocurrencies are laughed off by many serious investors, including many of the most widely respected.

Legendary investor Warren Buffett, head of Berkshire Hathaway, has said that he’s not interested in Bitcoin because it’s not a productive asset.

At the 2022 Berkshire Hathaway shareholder meeting, he said, “Now if you told me you own all of the Bitcoin in the world and you offered it to me for $25, I wouldn’t take it because what would I do with it? I’d have to sell it back to you one way or another. It isn’t going to do anything.“

Johnson quotes Buffett’s business partner Charlie Munger who said about crypto: “To me, it’s just dementia. It’s like somebody else is trading turds and you decide you can’t be left out.”

Ask yourself these questions before deciding if Bitcoin is right for your 401(k)

If you’re still interested in buying cryptocurrency, however, ask yourself a few questions to see whether it makes sense for you and your situation. Simpson offers three questions that he thinks the general public should be asking before they jump into the crypto market.

  • Why am I thinking of putting my money in this? “Is it just because it is what the media is telling me everyone else is doing,” says Simpson. “You would think that as recently as the Bernie Madoff case was, people would be leerier of ‘get rich quick’ schemes. We all hear about the people who made millions on cryptocurrencies. What we don’t hear about are the thousands of other people who went broke.”
  • Do I have the risk tolerance to invest in this? “We’ve all seen the wild swings in value that cryptocurrency goes through, sometimes daily,” he says. “Can you, as an investor, really stomach watching your account value go up by 50 percent this week and down 50 percent next?”
  • Do I understand what I’m investing in? “Most people do not have any idea how cryptocurrency works, how it’s valued and who uses it,” says Simpson. “Take some advice from Warren Buffett, don’t ever invest in something that you don’t understand.”

Even beyond these questions, you should consider how crypto fits into your retirement portfolio. The vast majority of Americans should steer clear of risky investments and stick to proven methods of generating wealth, says Chris Barnes, chief commercial officer, Escalent, a human insights company.

“Most are already behind on saving for retirement and trying to use cryptocurrency as a way to catch up is likely to end in more losses than gains,” says Barnes. “The truth is that the traditional, methodical and admittedly boring ways of saving money for retirement are the most effective – not cryptocurrencies.”

More companies likely to offer crypto in 401(k)s

With Fidelity’s move into Bitcoin for 401(k)s, industry watchers expect other retirement companies to follow suit, at least at the moment.

“Because such a big player in the 401(k) market has taken the step, I’m confident we will see more of the providers push towards this offering,” says Faron Daugs, CFP, wealth advisor, founder and CEO at Harrison Wallace Financial Group in the greater Chicago area.

“This is a great way for Fidelity to show it’s a responsive, cutting-edge brand that’s eager to meet popular demand for its customers,” says Barnes. “For those reasons, many of Fidelity’s competitors are likely to follow suit in short order. That said, I expect at least one brand will buck this trend and use their stand against cryptocurrencies in 401(k)s as a differentiator of their own.”

“For the industry, it means other 401(k) providers will have to find a way to offer this option to their investors to stay competitive,” says Simpson. “I don’t know if there will be more of a push for access to crypto in 401(k) plans, but there will need to be much more oversight, regulation and education about the crypto industry.”

Regulators are still skeptical of crypto

While Fidelity Investments is set to become the first major retirement-fund company to let participants hold Bitcoin in 401(k) accounts, the company and the broader industry could still feel pushback from government regulators on the move.

In March, the U.S. Department of Labor, which regulates company-sponsored plans, advised firms to “exercise extreme care” before allowing employees to invest in cryptocurrency as part of retirement plans.

“I’m certain that Fidelity did extensive research before they made a decision to authorize crypto purchases within its 401(k) platform,” said Daugs. “However, there could be some potential pushback, especially from regulators, due to the very speculative nature of cryptocurrency.”

Regulators have a number of different steps they could take to slow the rollout of cryptocurrency into retirement plans or eliminate it altogether.

“The government and regulators could slow down this expansion by increasing the regulatory burden that is placed upon these different cryptocurrencies,” says Simpson. “By forcing these investment options to be more transparent about their users, the number of coins in existence and how they are traded or held, it could have a significantly negative impact on their value, considering the largest users of cryptocurrencies worldwide are criminal organizations.”

Or regulators could work even more directly to stop 401(k) accounts from buying cryptocurrency.

“They could take a heavy-handed approach and outright ban cryptocurrencies from 401(k)s or tax-deferred accounts more broadly based on likelihood that they create dangerous bubbles or liabilities,” says Barnes. “Whether they opt to go this route will likely come down to the broader politics at play with regard to cryptocurrency regulation, which are a long way from fully playing out.”

But whatever regulators do, individuals are best positioned to protect themselves, because they’re able to make sensible decisions about what to own or not own.

“I believe truly understanding what you own and why you own it, is vitally important in any investment,” says Daugs. “As both an investor and advisor, I believe it’s extremely important to educate yourself on what you own, why you own it, and understand all the potential risks involved in that investment you are considering for your portfolio.”

Bottom line

While Fidelity Investments has jumped out ahead of other major rivals in allowing Bitcoin in its 401(k) accounts, that doesn’t mean you must invest in it, if you’re presented with the opportunity. Instead, experts recommend sticking with a time-tested means of generating wealth – buying and holding a well-diversified portfolio of high-quality investments and then adding to your portfolio over time. A great way to do this is to buy an index fund based on the S&P 500, which is available at low cost and has an enviable track record of returns over time.



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