Should I Use Crypto in My Retirement Accounts?

Ahh. The allure of shiny new things. Sometimes, we catch the glint of something valuable, like a rare diamond on Jeweler’s Row. Other times, our hearts flutter at the sight of something both beautiful and useful, like a bright new set of kitchen knives. We find items that appear attractive from afar, but are worthless, like a fallen plastic “crystal” from your aunt’s chandelier. And we carefully avoid those glittery things that are downright dangerous - like broken glass.

I’ve come across quite a few people who are drawn to the allure of shiny new investment vehicles like cryptocurrency. But how does the “shine” of Bitcoin compare to the shine of a silver dollar that can physically sit in the palm of my hand? Will this investment vehicle skyrocket in value or become a questionable addition for my retirement portfolio?

Cryptocurrency 101

When deciding whether cryptocurrency should become a part of a retirement plan, the first question people ask is, what is it? It’s important to understand the basics about this alluring (and often confusing) new investment vehicle rooted in technology, often called or associated with "Web3." But what exactly is that? Here's a quick rundown of the Web 123’s:

Web1: The term Web 1 refers to the caveman days of the Internet. The olden, dial-up times when the Internet was read-only.

Web2: You’re probably using it right now. We can read, interact, and share information. But the sites we visit are run by another person or entity. We don’t have complete control over information, and data breaches are the norm. 

Web3: Enter the new kid on the blockchain. Blockchain technology is based on a more secure data platform. Without getting too technical, information placed on the blockchain uses a digital fingerprint that is extremely difficult to hack, providing users much-desired transparency and control.

What does this have to do with Bitcoin and other cryptos? Cryptocurrency operates through the blockchain as a decentralized digital system, using cryptography for security. Because it’s not owned by any particular authority, it is difficult for governments to control.

Bitcoin is the best-known cryptocurrency, so that’s what we’ll focus on here. Many tech-savvy people are jumping on the Bitcoin bandwagon. Some say the attraction to Bitcoin stems from a fear that the U.S. government may one day collapse (frankly, if the U.S. economy falls apart, then we have bigger problems. But I digress).

Some are betting it will become the new currency of the people, while others just like the technology and the relative privacy it affords. While there is unequivocally a future for crypto, the challenge is guessing which to buy.

Bitcoin’s advantage in a zombie apocalypse is also its biggest real-life drawback. Cryptocurrency isn’t backed by a government. It technically has no “value” (the only value is in people using it to exchange). Unlike a shiny silver dollar, you can never hold cryptocurrency in your hand. 

Consider taxation

Bitcoin’s popularity means established government-regulated custodians for digital currency holdings like Coinbase are popping up. ETFs like Grayscale Bitcoin Trust (BTC) are becoming more common. This means the IRS is now able to easily collect its share. 

If you’re thinking of investing in crypto, carefully consider what type of account to use. Active trading is attractive for bitcoin, but it can become expensive because of the high transaction fees and potential tax implications. Tax-favored accounts could be a better way to invest for those who anticipate significant trading activity or want to be able to sell and avoid a big tax bill.

Is Bitcoin right for my IRA?

Despite its novelty, major investment firms are beginning to offer crypto directly and through ETF purchases. Just remember that anything speculative (meaning not publicly traded like stocks or bonds, or other liquid investments) gets categorized as an alternative investment. Bitcoin is an alternative investment. And it doesn’t have a long history, so it lacks the predictability needed to do any type of financial projection.

My advice as always is to be responsible with your portfolio and go with what you know. When choosing to add crypto to a portfolio, the percentage should be small enough that a decline wouldn’t compromise future financial independence.

I’m a business owner. Should I add Bitcoin to a company’s 401K?

It really depends. A Department of Labor (DOL) release strongly discourages cryptocurrency for retirement plan investment menus based on the following 5 reasons:

• It is speculative and volatile
• It’s difficult for experts to evaluate (harder still for plan participants)
• It has the potential for custodial and recordkeeping issues
• The models and methodologies for cryptocurrency valuations are unsettled
• The regulatory environment is unsettled and evolving

And business owners are considered fiduciaries. The DOL also warns fiduciaries to consider the risks, and how their actions square with their duties of prudence and loyalty. The fiduciary has a legal duty to protect plan assets by diversifying in a way that minimizes risk unless it is clearly prudent not to do so.

For 401(k) plans that let participants choose their own investments from a menu, the options available on the menu must be diverse. Many plans are waiting for further regulation and guidance.

That said, if you are thinking about offering Bitcoin or any digital asset in your company’s 401K, or even adding it to your own portfolio, look carefully at the selections; at the moment, there are virtually no barriers to entry for people creating investments in this space.

Be sure to do your research and examine your investment thoroughly. A magnifying glass will help you see if your shiny new coin is a diamond, or a sharp piece of glass.

Information presented in this article is for educational purposes only. Any mention of specific securities should not be considered a recommendation.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Cryptocurrencies Blockchain Retirement Investing Personal Finance