Having a pile of money at your fingertips can sometimes lure you into a jungle you best not enter. The problem is that, sooner or later, you’re going to look at your retirement savings account and discover you have a big pile of money. Then, you’re going to have to fight back the urge to gamble.
And sometimes, you won’t know you’ve gambled until the casino takes away your last chip.
You don’t have to be a Captain Renault to realize cryptocurrencies don’t have the kind of track record needed to assure you they aren’t the same as gambling.
“Cryptocurrency is digital currency that’s not part of a bank and is designed to be free from government control — or perhaps better put, a digital, decentralized currency,” says Stuart Robertson, CEO of ShareBuilder 401k in Seattle. “It can be used for the purchase of goods and services wherever it is accepted, and items may be bought anonymously. As it is not part of a bank, it is not FDIC insured. Bitcoin is the most popular player in the cryptocurrency arena, but there are many other providers. Some countries don’t allow for the legal use of cryptocurrency.”
Lately, however, there’s been a push to allow retirement plans to invest in these newly formed assets. This push isn’t coming just from those who profit from sales of such things as Bitcoin, but also from the novice investors themselves.
“With over $32 trillion in retirement funds and approximately $12 trillion of IRAs, most Americans use the retirement system as their primary source for wealth accumulation,” says Adam Bergman, CEO and Founder of IRA Financial in Miami Beach. “Hence, most Americans use their retirement account as the primary savings vehicle. With the growth in the cryptocurrency market, more and more Americans have turned to their retirement account as the vehicle for investing in cryptos.”
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While there’s not a lot of history (Bitcoin, the first cryptocurrency, didn’t exist until 2009), what you do see suggests something more akin to high-stakes gambling than long-term investing.
“Cryptocurrency investments, such as Bitcoins, are uncertain and highly volatile,” says Bergman. “Any retirement account investor interested in using retirement funds to invest in cryptocurrencies should do their due diligence and proceed with caution. For example, the price of Bitcoin can fluctuate by 5% plus or minus on a given day, which is far more volatile than a mutual fund or most equities.”
“It’s not just the performance history, but cryptocurrencies come with other risks,” says Jahon Jamali, Co-Founder and Chief Marketing Officer at Sarson Funds in Sherman Oaks, California. “As a young asset class (only 11 years old), there have yet to be compressive investor protection laws put around cryptocurrencies. This makes the category susceptible to fraud and/or malfeasance.”
Already, however, the investment industry is finding ways to reduce these risks by merging the unregulated investment into regulated products. It’s not clear how much protection this affords, but it’s a start. It also makes cryptocurrency more compatible with generally accepted retirement plan platforms and frameworks.
“Some of the current push may be a result of recent development of investment products that now allow investors to invest in Bitcoin-related returns in publicly registered funds that are regulated under the Investment Company Act of 1940,” says Karan Sood, Head of Product Development at Cboe Vest in McLean, Virginia. “These products provide investors protections that they have come to expect from investment in other such regulated funds. Some of these mutual funds also implement investment strategies that provide exposure to Bitcoin while controlling for the extreme volatility of Bitcoin.”
Usually, ordinary investors don’t take a second look at regulatory requirements. They’re only concerned with one thing, and it’s the same thing that keeps cryptocurrencies in the headlines. Put two and two together and you’ll quickly discover why employees want to place these assets in their 401(k) accounts.
“Higher returns dramatically increase the chances of retiring!” says Eddie Yoon, Co-Founder of Category Pirates and Founder of EddieWouldGrow, LLC in New York City.
Performance may be a door opener, but there’s more to Bitcoin et al than that. Cryptocurrencies fall neatly into a narrative those following the markets happily buy into.
“Cryptocurrencies are still an emerging asset class, but one that has demonstrated strong growth in the past year,” says Chris Panteli, Founder of LifeUpswing in Denver. “Many investors are looking at it as a possible store of value and hedge against geopolitical and macroeconomic risk. These factors suggest that Bitcoin and other cryptocurrencies could become a legitimate asset class in the future and disrupt the global investment landscape.”
Even financial professionals are beginning to see how these instruments dovetail nicely into standard portfolio management strategies and tactics.
“Diversifying your portfolio for a future where currency will look differently,” says Chris Kline, COO and Co-founder of Bitcoin IRA in Sherman Oaks, California. “People are revolutionizing their retirement savings by being a part of the next wave of economics and are defending themselves from looming inflation ahead. Although volatile, Bitcoin has historically over performed every other asset class over the last five years.”
But it is the very nature of that performance that has caused others to step back. Though they may agree cryptocurrencies are, indeed, a unique asset class, they have a different mind when it comes to exactly what kind of asset class it is, and, therefore, where it fits in an investment strategy.
“While cryptocurrency is designed to be a medium of exchange, Bitcoin and other cryptos are currently behaving like highly speculative assets which undermines its ability to be an effective currency,” says Robertson. “The speculative nature of these assets requires careful risk management and is likely more appropriate for shorter holding periods than those typically found in retirement plans. Put another way, the current state of cryptocurrencies is better suited for trading rather than investing.”
An additional way to look at Bitcoin is to use its trendiness to spur more to invest for retirement. It’s the attraction to investing in it that makes it more likely people who don’t normally save for retirement begin to save. Don’t the ends of greater retirement saving justify the means of investing in Bitcoin?
“The country is facing a retirement epidemic,” says Chris Gure, a financial consultant in Raleigh, North Carolina. “People are not interested in saving for their future. They are interested in Bitcoin. This is a way to re-engage retirement plan participants and let them invest in their own future. The tax benefits of wrapping your investment in a retirement account is an obvious plus!”
Of course, not all agree with this Machiavellian model of retirement saving and investing. They would suggest the downside negates the upside.
“The most important goal of retirement planning is not running out of money,” says John Kauth, CEO of Intercontinental Wealth Advisors in San Antonio. “Having an asset class that can gain or lose 50% of its value in a matter of a few days does not belong in a retirement plan.”
“Cryptocurrency should not be part of an allocation of assets designed to meet future goals such as saving for a child’s education, purchasing a home, or funding retirement needs,” says Shelly-Ann N. Eweka, Senior Director, Financial Planning Strategy at TIAA in Charlotte, North Carolina. “While the lack of governing authority is sometimes touted as a cryptocurrency feature rather than a bug, I would argue the reverse is true.”
Eweka has plenty of reasons to support her position. She says “cryptocurrencies are not driven by the traditional supply and demand fundamentals that help determine the underlying value of other asset classes. This leads to a lack of transparency, increases the volatility of cryptocurrencies, and makes them unreliable as an investable asset and as a store of value. They have no risk premium, and do not produce income or cash flows.”
Perhaps most importantly, Eweka reminds everyone who has ever been frustrated trying to find a lost password what might be the greatest risk to investing directly into assets like Bitcoin. “If your 256-bit private key is lost/stolen, you no longer own the cryptocurrency,” she says, “and you permanently lose those digital assets.”
It is these types of risks that retirement plan sponsors have to consider before agreeing to include cryptocurrencies in their plans’ investment options menus. In addition, if they do allow such investments, they must be prepared to do other things to ensure employees invest knowingly.
“The ramifications for retirement plan fiduciaries regarding allowing Bitcoin investing into their plans is increased education and communication,” says Daniel Strachman, Managing Partner at A&C Advisors in Coral Springs, Florida. “Although this move for fiduciaries is unclear based on the limited regulations on Bitcoin to date, one would expect the plan fiduciaries would have to use the same standard of care for Bitcoin as they do for any other asset class. They will need to provide extensive education and information about the asset and make sure the plan participants understand the risks of investing in such a volatile asset.”
What will it take to move cryptocurrencies out of the danger zone? And will they lose their allure when that happens?
“Think about this,” says Robertson. “Are you comfortable getting your paycheck in Bitcoin? Most will say ‘No.’ When you can say ‘Yes,’ it will have made it through many hurdles and many of the risks discussed here will be resolved. And, that could also mean returns more in line with cash. We will see.”
When it comes to Bitcoin and other cryptocurrencies, we are still in the formative “Wild West” years. There will be a few pioneers brave enough to venture into the raw winds of the open prairie, but you may prefer to wait.
Will you miss out on a once-in-a-lifetime opportunity? Maybe. But you’re probably happy just not to bet it all on red only to see the roulette wheel stop with the ball on black 22.