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Fidelity announced on Tuesday it’s going to launch a way for workers to put up to 20% of their 401(k) savings and contributions directly in Bitcoin. This would make Fidelity the first company in the financial services industry to allow this service without having to go through a separate brokerage window, bringing us to a new frontier of retirement savings plans. But are all new frontiers…good frontiers?
Last month, the U.S. Department of Labor issued a statement warning people from investing their retirement funds in volatile digital currencies. They explain, “the retirement savings of America’s workers and their families represent years of hard work and sacrifice… At this early stage in the history of cryptocurrencies, however, the U.S. Department of Labor has serious concerns about [retirement] plans’ decisions to expose participants to direct investments in cryptocurrencies.”
On the surface, the appeal of investing part of your 401(k) in cryptocurrency is simple—you can earn a lot of money in a short period of time. In fact, the success of cryptocurrency companies hinges on this appeal; if you don’t buy in now, you’re going to be left behind. They throw A-list celebrities at you, like Lebron James and Matt Damon, and tell you to get on board because the train is about to leave the station. They spend tons of money spreading this message, including at least $26 million on Super Bowl advertisements.
What’s conveniently not included in their sales pitch is the risk you’re taking investing in cryptocurrency. What’s the flip side of making a lot of money in a short period of time? It’s losing a lot of money in a short period of time. The Department of Labor laid out four reasons why cryptocurrency presents a risk to your retirement savings:
- Valuation concerns. Financial experts have fundamental disagreements and concerns about how to value cryptocurrencies. These concerns are compounded by the fact that cryptocurrencies are not typically subject to the same reporting and data integrity requirements that apply to more traditional investment products. Scammers have used misleading information to inflate the price of cryptocurrencies, and then sold their own holdings for a profit before the value of the currency drops.
- Obstacles to making informed decisions. These investments can easily attract investments from inexperienced plan participants with expectations of high returns and little appreciation of the risks the investments pose. It can be very hard for ordinary investors to separate fact from hype. When fiduciaries include a cryptocurrency option on a 401(k) plan menu, it signals to participants that knowledgeable investment experts have approved it as a prudent option. This can mislead participants about the risks and cause big losses.
- Prices can change quickly and dramatically. Cryptocurrencies’ prices have been extremely volatile. For example, in just one day last December, the price of bitcoin dropped by more than 17 percent. These large swings can leave participants vulnerable to significant losses.
- Evolving regulatory landscape. Laws and rules are swiftly evolving. For example, the president’s recent executive order directs federal agencies to study risks and policy approaches to digital assets, including cryptocurrency. Changes in the United States and globally may impact existing regulatory frameworks.
I’m not here to tell you not to invest in cryptocurrency at all. You’re an adult, it’s your money, do what you want. I’m just laying out a friendly reminder that “volatility” is typically not a word you want associated with your long-term investments. As long as cryptocurrency still exists in a largely unregulated market, the safest bet is to steer clear of it when using money you can’t afford to lose.
from Lifehacker https://ift.tt/xhFYXIy
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