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Bitcoin: Coming to a 401(k) Plan Near You?

Photo of author, David McKinley, CFP®.
David McKinley, CFP®
President and Chief Investment Officer

To begin this discussion, let's recap how much of all money is in Bitcoin as of May 30, 2021*.

  • A Bitcoin was worth 34,843 U.S. dollars as of May 30, 2021.
  • All the Bitcoins in the world were worth roughly $653 billion.
  • The combined value of Bitcoin was equivalent to just 1.7% of the world's money.

As of July 28, 2021, the one-year high for Bitcoin was 63,588 (on April 13, 2021) and the low was 10,924 on July 28, 2020. To say the price is volatile is an understatement. The prudence in adding Bitcoin (BTC) to a retirement plan is questionable, at best. Greater media coverage has caused BTC interest to grow exponentially, as has its meteoric rise in price.

Currency, let alone cryptocurrency, lacks intrinsic value, and does not provide dividends or income. The absence of intrinsic value, dividends, or income makes currency a less than ideal investment option because price becomes more a function of supply verses demand. Thus currencies are difficult to value and develop a long-range return forecast.

Newer currencies like BTC contain elements of speculation because their approaches, adoption and technology are unproven. This can lead to tremendous volatility (see this discussion in our previous article), making them risky options for even the most sophisticated investors.

U.S. Department of Treasury Secretary Janet Yellen recently issued a warning, stating that “(BTC) is a highly speculative asset, and you know I think people should be aware it can be extremely volatile and I do worry about potential losses that investors can suffer.”

BTC had taken early root among a variety of communities. Some saw it as a means of independence from governed societies’ financial systems while others believed it to have more diverse uses such as a way for an alternative currency to reach emerging markets, an opportunity for more seamless electronic payments, and the facilitation of anonymous transactions.

The anonymity use-case which has driven BTC’s adoption is in turn subject to significant sustainability risk as more federal governments and nation states look to exert more control and regulation over these currencies. In fact, this may be the only way for cryptocurrency to be adopted en masse.

When it comes to building sound retirement portfolios, investing in assets that have intrinsic value and produce dividends and income continue to be the best strategies for those looking for outcomes that are more consistent and predictable.

This not only applies to defined benefit investors looking to achieve some level of return or target a certain funded status, but to participants in defined contribution plans as well. If a plan decided to add cryptocurrencies to their fund offering, most participants do not possess the knowledge or expertise to make an informed and prudent allocation to this option.

This would potentially open the door to fiduciary liability on behalf of plan sponsors who are responsible for monitoring designated investment alternatives made available to participants. Furthermore, from an administrative standpoint a lot of grey area persists. The infrastructure required to custody this type of asset is something most plan administrators lack at present.

While the innovative technology and recent returns can make this an exciting story to follow, the fiduciary considerations, wild valuation swings and uncertainty on several fronts make it clear: in building retirement portfolios it’s best to continue to watch BTC, and cryptocurrencies in general, from the sidelines, for now.


* Source: Investopedia, May 31, 2021

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