27 May 2024

Should You Have Bitcoin In Your 401k?

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Will Bitcoin and other cryptocurrencies help you save for retirement? I can't say there's a clear answer to that question, so let's consider the pros and cons.

Ideally, you want a vehicle that's going to appreciate and compound. Stocks and bonds fill the bill most of the time, but not always.

Why not Bitcoin or any of several thousand cryptocurrencies? Aren't they considered diversified assets that don't move in lockstep with stocks and bonds?

In a recent paper written by Charles Hodge at Milliman, a benefits consulting firm, the best advice is to wait on adding cryptocurrencies to retirement plans.

Hodge, however, likes the prospects of the underlying technology behind Bitcoin, which is called the blockchain.

"While Bitcoin currently has challenges in the retirement plan space," Hodge writes, "blockchain technology has the potential to generate returns for its adopters. For example, the Australian Stock Exchange plans to use blockchain to process equity transactions."

That doesn't mean that cryptocurrencies are a forbidden idea as long-term investments. It's just difficult to tell which ones will provide a positive return over time, which is also a problem with stocks.

The Downside 

Let's view cryptocurrency investing through another lens. First of all, prices are vertigo-inducing volatile. Bitcoin started the year around $13,000 and has been hovering around $8,000. It was around $2,000 in early 2017.

Unlike stocks, which have earnings and dividends, cryptos don't have any underlying valuation metrics. They have no price/earnings or price/book ratios, for example. They are all price.

Unlike a big stock like Apple, analysts are all over the board on where Bitcoin prices are going. Some predict $20,000 while others say it's going to crash. Cryptos aren't regulated, although several government agencies around the world are gearing up for it.

Then there's the liability of having something as volatile as a cryptocurrency in a retirement plan. Plan providers are liable for the investments they offer. If they allow vehicles that are too risky or inappropriate, they can -- and will -- get sued.

"At this time, Bitcoin and other cryptocurrencies are not appropriate for retirement plan sponsors," concludes Hodge. "...plan sponsors should not yet consider them a distinct asset class."

In the interim, I would suggest you wait until there's a low-cost, exchange-traded fund that holds a basket of cyptos. It won't necessarily be a safer investment, but it will allow you to diversify and blunt some of the risk.

Better yet, make sure your mix of stocks, bonds and cash is right for your age and ability to stomach risk.

Click here for the original article from Forbes.

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