Is it too Soon for Crypto to Come to the 401(K)?

Is it too Soon for Crypto to Come to the 401(K)?

Cryptocurrencies have increasingly gained traction throughout the last decade. As technology progressed, cryptocurrency, or crypto for short, has gained momentum as not only a medium for exchange, but also as an investment opportunity. There are thousands of different types of cryptocurrencies, however, you most likely heard of at least one of these three types of crypto tokens: Bitcoin, Ethereum, and XRP.

The relatively rapid price appreciation of such digital currencies has turned heads. Think about this, Bitcoin was worth less than a penny back in 2009. Throughout May to June of the 2021 market period, Bitcoin has surpassed $30,000 for one token. Market demand has driven the price sky-high, as both individual investors and firms have flocked to the cryptocurrency market.

Buyers have been able to enter the market through applications that contain a “digital wallet.” Think of these apps where the buyer transfers real money to buy cryptocurrencies. Beyond this method of investing, consumers have been limited. As more interest has formed regarding crypto, an increasing number of investment firms aim to get a piece of the pie. However, one in particular has proposed merging both the crypto and retirement markets.

ForUsAll, a small 401(k) provider, will soon be allowing investors to allocate up to 5% of their investable assets into crypto. Using Coinbase, a cryptocurrency exchange app, as their partner, the investment firm aspires to give everyday investors the ability to make crypto a part of their investment portfolio. As of now, the company is offering both a traditional and Roth 401(k) to allow individual taxpayers to save for retirement while investing in cryptocurrency.

Regardless of the type of retirement account these prospective consumers choose, the question really is, do cryptocurrencies belong in retirement accounts? The short answer is that it depends. Each investor is unique and needs to evaluate the information available to properly weigh risks. Here are just a few things to consider:

1. Cryptocurrency is largely unregulated.

Many cryptocurrencies such as Bitcoin or Ethereum, remain unregulated by the Securities and Exchange Commission, or the SEC for short. Conversely, ETFs and mutual funds, commonly found in 401(k) products, are subject to such regulations.

2. The Cryptocurrency market is highly volatile.

The reason why the pricing of most cryptocurrencies are extremely volatile is that many tokens, including Bitcoin, are scarce in quantity and these coins are not managed by a central bank. Like any currency, for an individual to turn a profit, someone else subsequently has to pay more for the currency than the person before them. Think of the “Greater Fool Theory,” which argues that price appreciation happens through selling an overpriced asset to the next person. This cycle perpetuates until there are no buyers left in the market. This will subsequently cause a major sell-off, in other words, a significant price decrease.

3. Remember in 2008, when people were issued debit cards for their 401(k)’s? Is this yet another example of overcomplicating 401(k)’s?

Back in 2008, when employees invested in a 401(k), some companies began to issue these so-called “debit cards.” In reality, these “debit cards” worked more like credit cards. The money that was charged against a 401(k) was treated as a loan against the account, which was subject to early withdrawal fees, interest, and penalties. Will crypto follow suit in overcomplicating the 401(k) by adding yet another asset class? The answer is too early to tell. When examining crypto, there is not enough market history to predict if this is will be a profitable investment for the long term.

4. The issue of liquidity with a 401(k).

Due to the volatile nature of cryptocurrencies, the price fluctuations are massive. If an employee wanted to sell their coins in their retirement account before they meet the minimum age to withdraw penalty-free, they are likely to pay more in taxes and fees than investing in crypto using conventional methods, such as using an application like Coinbase.

Right now, the use of crypto in the IRA market remains highly exclusive, as large retirement investment firms still refrain from using it as an asset class in their employee retirement portfolios. Due to its volatility and lack of regulations, it is unclear if Bitcoin, or any other token, will become a viable investment choice for your retirement plan. Remember, as an employer, you have a fiduciary responsibility to your employees … so consider carefully should your pension company allow crypto options within your plan.

This article was also featured in our newsletter Pension Planner Vol. 4.

To learn more about this topic, please contact:

Tania Quigley, CPA

Tania Quigley, CPA


Tania Quigley has been a member of Cerini & Associates’ audit and consulting practice area since 2005 where she focuses on serving the firms nonprofit and employee benefit plan clientele. Tania has experience in performing financial statement audits and reviews, tax return preparation, cost report preparation and filing, retirement plan audits, and other consulting. Tania brings her expertise, diversified background, and helpful approach to all of her engagements.

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