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Crypto In Your 401(k)? A Virtual Toss Up.

By Kelvin Lee , Alonso Munoz

Back in April, Fidelity announced a digital assets account that would allow its 401(k) participants to purchase Bitcoin (BTC) directly by the end of the year. We ask ourselves: is this a good idea for your 401(k)? The short answer is, “probably not”.

The fundamental goal of a 401(k) is investing for retirement. It’s part of your life savings and therefore, an appropriate risk strategy should be applied to the assets inside. When you purchase traditional investments, i.e., stocks and bonds, you’re purchasing a company’s debt and equity. The firms’ dividends, growth, cash flows and interest payments back up the investment and are factored into the purchase cost. The problem with Bitcoin is that the price is purely demand driven. Fundamentals and valuations don’t apply as there isn’t an underlying asset that currently supports the currency. Future price movements are then difficult to estimate and extremely volatile. Even stable coins, which were developed as a haven from the typical volatility of crypto assets, collapsed back in May.

What about the “diversification” benefits of BTC? Since every BTC is ultimately just an entry on a decentralized ledger, it should be separated from the market and not affected by rising rates and inflation, right? We disagree with this sentiment. Looking at this past year, BTC has moved correspondingly with tech stocks (represented by the NASDAQ 100 below). A monthly correlation coefficient of .691 indicates very strong association between the two measures. So, investors are left wondering what the benefits of holding BTC are when similar performance can be found in more traditional investments.

In a blatant disregard for the recent BTC pullback and stable coin disasters, there are still many crypto proponents. And while we are skeptical of the “asset class” entering your 401(k), we aren’t opposed to virtual currencies and the decentralized technology they work off. It will be interesting to see how Plan Sponsors, investment fiduciaries, and recordkeeping platforms adapt to Crypto entering the Qualified Plan arena.


* Source: Bloomberg




To contact the author of this story:
Kelvin Lee at kelvin@hamiltoncapllc.com



To contact the editor responsible for this story:
Alonso Munoz at alonso@hamiltoncapllc.com

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