Crypto can arrive on your 401(k). Here’s what to know now | Smart Change: Personal Finances
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Fidelity Investments announced on Tuesday that it will offer 401(k) investors access to Bitcoin as an investment choice in their retirement accounts. This is big news because Fidelity is a legacy investment brand and cryptocurrencies have been pretty much on the fringes of the investment world – until now.
Fidelity says it is the first major pension plan sponsor to announce the Bitcoin Investments offering.
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In recent years, the knee-jerk reaction of many financial advisors has been to caution clients against crypto investments. It’s “too volatile”. Has no “intrinsic value.” It’s a “Ponzi scheme”, many have said.
Let’s face the facts: the blockchain technology that underpins cryptos isn’t going away any time soon. But let’s get past the noise and consider whether Bitcoin and its brethren could fit into your investment plan.
Your employer will make the first choice
First, the news from Fidelity will not mean Bitcoin will immediately appear on your 401(k) plan’s investment menu. Fidelity is still “building its digital asset platform,” according to a press release, and the bitcoin option won’t be available in its 401(k) plans until later this year.
Beyond that, employers will need to approve crypto investments in the plans they provide to their staff. And because of their fiduciary duty – to place the needs of plan members above all else – they may be reluctant to provide immediate access. Many will likely take a wait-and-see attitude before offering crypto as part of their retirement plans.
One reason for that: Last month, the US Department of Labor urged plan sponsors to exercise “extreme caution” before offering cryptocurrency investments in 401(k) plans.
“Fiduciaries must act solely in the financial interests of plan participants and maintain a rigorous standard of professional care. Courts have commonly characterized these duties of care and loyalty as “the highest known by law.” Trustees who breach such obligations shall be personally liable for any loss suffered by the scheme resulting from such breach,” the department said in a special compliance statement in March.
That’s more than enough to eliminate a bladder leak for most employers.
Take a bowel test
But let’s say a bitcoin investment option appears in your 401(k) one day. Or you want to put some in your IRA or just an old regular investment account.
You’re probably expecting some sort of grim warning, right? Like I could talk you out of it or something.
No. I have invested in bitcoin before. I don’t have any now, and there’s a pretty interesting story behind it. And this is not a frightening loss that I suffered. Remind me to tell you about it someday.
The thing I will say is how does it feel to see your savings account I worked for that money suffer a sudden and massive loss? Are you one of those “it will bounce back one day” investors? Or are you more likely to think, “Dang! That account was worth a fortune six months ago – I could have bought a house with the money!”
Mark Cuban can ignore a $200,000 loss on a cryptocurrency, but you know: billionaire.
Consider the last 12 months
Let’s say you bought a whole bitcoin a year ago. And to put it simply, you paid $50,000 for it. (I bought when a bitcoin was $2,500 a few years ago and thought it was too rich. Feel me?)
A year later, that Bitcoin alone is worth around $40,000. You have lost $10,000. Is it making a knot in your stomach, or is it okay?
And in that year alone, from the end of April 2021 until today, it reached around $67,500. Now, does that look like a loss of $10,000 or a loss of $27,500?
Of course, that’s hypothetical, but if you can put yourself in that situation and it’s okay with you, then maybe a taste of crypto investing is something you can stomach. In a retirement account, it can be little more than a little sweetener to your core investments.
Or maybe the stock market gives you enough thrills.
Disclosure: The author held no position in the above investments at the time of initial publication.
A beginner’s guide to crypto lingo
Bitcoin is a crypto-currency created in 2009 by an unknown person (or persons) using the nickname Satoshi Nakamoto. Unlike traditional currencies such as the US dollar, bitcoin is not controlled by a bank or government. Bitcoin is by far the most valuable and popular cryptocurrency in use today.
A blockchain is a digital ledger and the key technology that underpins most cryptocurrencies, non-fungible tokens (more on those later), and other unique digital items.
Blockchain can be used to store all kinds of information, but its most common use so far is to record cryptocurrency transactions. Once a transaction is made, it is posted to this public ledger, which is managed by a global peer-to-peer network – millions of computers, in the case of bitcoin.
Blockchain is fundamental to bitcoin’s appeal: as a decentralized database, it cannot be controlled by any one person or group, unlike fiat currency such as the US dollar, which is managed by a bank. central.
Buy the damn dip (BTFD)
A rallying cry for crypto bulls that urges investors to buy coins when prices fall.
The leading cryptocurrency exchange platform. The company went public in April, an event that many considered a turning point in the history of cryptocurrency’s journey into the mainstream market.
A fully digital monetary system consisting of “coins” or “tokens” that are controlled by a decentralized ledger.
The weird of the crypto family started as a joke based on the “doge” meme in 2013. But as cryptos have gained wide mainstream interest, dogecoin has become an unexpected heavy hitter. It now has a market capitalization of over $30 billion and it has jumped over 5,000% so far this year. And unlike its more popular brethren, a single dogecoin is still cheap – it hit an all-time high of around 45 cents in April. Whether or not this is a smart investment remains an active question.
Tesla CEO whose tweets are known to spark rallies in cryptocurrencies such as bitcoin and dogecoin.
An open-source blockchain-based software that controls the Ether cryptocurrency. It is the second largest digital currency by market capitalization with nearly $300 billion.
FUD (“fear, uncertainty, doubt”)
In crypto parlance, FUD refers to negative information that weighs on the value of an asset.
The complicated process by which new bitcoins come into circulation. Mining is not for amateur enthusiasts: it requires powerful computers that solve complex mathematical puzzles to create a new “block” on the blockchain.
The mining process consumes a lot of computing power and electricity, which has raised concerns about bitcoin’s environmental impact.
Non-fungible tokens, or NFTs, are pieces of digital content tied to the Ethereum blockchain. “Non-fungible” essentially means one-of-a-kind, something that cannot be replaced, unlike, say, a dollar bill which you can replace with any other dollar bill. Simply put, NFTs turn digital artworks and other collectibles into unique, verifiable assets.
The nickname that refers to the person (or people) who invented bitcoin. Their true identity remains unknown.
Satoshis, aka “Sats”
The smallest bitcoin unit ever recorded on the blockchain, equal to one millionth of a bitcoin.
Like the physical thing you carry your money and cards in, a wallet in the crypto world is a place to store digital currency. The main thing you should know about wallets is that you should never lose or forget your password.