Fidelity Investments' recently announced that the Bitcoin 401 (k) system could not arrive at a bad time. The digital currency, called the stock market and the inflation hedge fund, was crushed in the market and is now below $ 30,000 after starting a year of more than $ 47,000.
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However, crypto experts say the launch time is too short for their concerns. They say the biggest problems they see with Fidelity’s Bitcoin 401 (k) system are found in its two key features - it provides exposure to Bitcoin only and allows investors to offer up to 20% of their accounts in digital currency.
Retirement and crypto investment experts say both of these features are not compatible with investment bases, other assets like Bitcoin are also different. On the other hand, Fidelity said it sees the Bitcoin product as just a start, aiming to expand on other digital assets.
Here is what the investment pros have to say about these features of the Fidelity system:
Lack of Diversity
Few would deny that cryptocurrency and blockchain have the potential to be transformative technologies. A variety of digital currencies — including Bitcoin, Ethereum, Solana, Polkadot, and others — create opportunities to innovate technologies with a wide range of potential applications.
However, the lack of diversity in the Fidelity system contradicts the intended benefit of diversification of crypto currencies. A 100% crypto portfolio of Bitcoin or 100% Ethereum, or even a combination of both, is incorrect, says Matt Hougan, chief investment officer at Bitwise Asset Management.
David Ramirez, chief investment officer at 401 (k) ForUsAll provider, says diversity is important for a balanced retirement portfolio.
"Given that the industry is still evolving, we feel it is important to allow participants to invest in a variety of cryptocurrencies," he said, noting that ForUsAll offers access to a wide range of institutionalized cryptocurrencies.
Distribution Size
Aside from the one crypto option Fidelity can offer in its system, the company's 20% limit on Bitcoin Holdings to its 401 (k) customers seems to exceed the standards of crypto experts who say it makes sense. Indeed, many financial advisers will recognize the huge share of their clients' retirement savings in any financial instrument with a risk profile such as crypto.
"In the case of a 401 (k) scheme where the employer is responsible for the loyalty of the program participants, 20% is too high for most investors," said Adam Bergman, founder and CEO of IRA Financial Group, a retirement program provider that allows clients to invest. in a variety of digital currencies.
That doesn't mean he doesn't believe in 401 (k) and other retirees should not seek exposure to cryptos. Bergman states that every retiree holder must have a crypto account, even if it costs only $ 100. "I believe the reward for gaining knowledge of emerging assets far outweighs the risk," he said. "The question is how much exposure should a retired investor have."
For many save for retirement, he adds, the limit should be between 1% and 5%.
That is supported by historical data, according to Hougan. "If you hold more than 5% of the crypto in the portfolio, it becomes the main driver of the top down in the portfolio and presents significant behavioral risks," he says.
At ForUsAll, which was the first platform to offer the crypto option in its 401 (k) programs, participants automatically set up an allocation of up to 5%. Although Ramirez sees nothing inherently wrong with the high cap, "we recognize that fiduciaries may have a broader view of cryptocurrencies ... [and] a 5% share cap helps limit risk exposure for participants." ForUS account holders are all given the opportunity to re-evaluate crypto into additional traditional currencies in order to keep the crypto share within limits, Ramirez said.
Bottom Line
Reliability is not new in the world of crypto and blockchain. In 2020, for example, it launched a secret Bitcoin-only wallet available to authorized investors, with a minimum of $ 100,000 to invest.
Whether Fidelity’s plan to allow Bitcoin investments that are likely to be large across all accounts sounded, the movement reflects the fact that 401 (k) investors want crypto access, and that the demand from system sponsors is real. "In the long run, employers will want their 401 (k) systems to provide exposure to crypto because employees will want it," Hougan said.
In the short term, however, the legal push is why Bergman believes employers may not be quick to jump on the 401 (k) -crypto bandwagon.
The Department of Labor, in its March 10 issue of crypto options on 401 (k) programs, said: “In this early stage of the history of cryptocurrencies, the Department is deeply concerned about the discretion of a reliable person to disclose 401 (k) system participants. to direct investment in cryptocurrencies, or other products whose value is linked to cryptocurrencies. ”
"I do not believe that many large financial institutions and trading firms will offer cryptos as investment options to their 401 (k) system clients," said Bergman, adding that the mood could change if the price of cryptos doubled and the need to reach cryptos. it flies again.
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