The last few months have been a whirlwind for cryptocurrency. Markets have dipped several times, including the drama of mid-2022, which saw the popular cryptocurrency Bitcoin fall in value by 70% from its all-time peak in November 2021. But despite the unsteady markets of late, Bitcoin is making its way into the offerings of some 401(k) plans.
In May of 2022, Fidelity announced it would soon begin allowing participants to allocate up to 20% of their retirement savings to Bitcoin. A much smaller provider, ForUsAll, made a similar announcement in June, and more may follow suit in the months and years to come. While cryptocurrency has been a lucrative investment for some, it’s important for investors to weigh their options carefully and approach crypto with caution if their retirement plan begins offering it.
Volatile Assets Mean Higher Risk Levels
Cryptocurrency is a notoriously volatile asset. This means the values of cryptocurrencies tend to go up and down often, and by large amounts. Significant upswings and downswings in a single day have made frequent headlines. Several economists have noted that cryptocurrency doesn’t tend to behave similarly to other asset classes given similar market conditions, making it increasingly hard to predict how crypto will perform in periods of inflation or recession, for example.
Caution Is Warranted
One of the best ways to make sure you’re making the right decision before you add cryptocurrency to your portfolio is to do your homework. Cryptocurrency is a new asset with different underlying mechanisms than stocks, so it’s important to understand the technology that enables crypto and the factors that influence its value before you invest.
A good rule of thumb is to only invest money in cryptocurrency that you’re prepared to lose. Some investors have lost nearly all of their crypto, whether due to market drops, crypto provider failures or even rare instances of hacking. In addition, cryptocurrency is decentralized, which means that no government or single financial institution backs it, even when it’s included in a highly regulated account like a 401(k). If this is money that you’re depending on, a more stable asset with a strong institutional backing may well be a better choice for you.
Let a Professional Help You
Though some successful investors and celebrities have touted the benefits of cryptocurrency, it’s important not to be swayed by the hype, particularly when you’re saving for retirement. Remember, high-income investors can afford to lose money due to volatility that everyday retirement savers might not be prepared to lose.
Do your research, make sure you understand this asset and be prepared for high volatility. It’s also important to diversify your portfolio and choose a mixture of assets to balance it out. If you’re planning to add cryptocurrency to your retirement fund, it may be useful to talk to a financial professional first who can help you find the right amount of cryptocurrency for your portfolio — which for many might be exactly zero, depending on their personal risk tolerance.