Redefining Risk: Crypto and Retirement Savings

In the same week that United States’ largest 401(k) provider — Fidelity — said it would give 23,000 employers the option to have employees add bitcoin and other crypto assets to their retirement savings, officials at the Labor Department and Senators Elizabeth Warren and Tina Smith expressed misgivings that Fidelity’s plan was too risky.

Warren and Smith wrote Fidelity’s CEO Abigail Johnson that “Investing in cryptocurrencies is a risky and speculative gamble, and we are concerned that Fidelity would take these risks with millions of Americans’ retirement savings.”

As news coverage of the letter emerged, risk became a relative term. The same day, the Dow Jones dropped more than 1,000 points, the NASDAQ lost more than 5% and individual stocks such as Tesla (-8.3%) and Amazon (-7.6%) suffered even deeper losses. Bitcoin fell approximately 7% and bank stocks fell 2.7%, according to the KBW Nasdaq in dex of large commercial lenders.

For the year, the tech heavy Nasdaq Composite Index has fallen almost 21% this year, while bitcoin is down about 20%. This begs the question of: How exactly is risk defined?

Crypto Alongside Other Alternative Investments like Gold and Private Equity

Bitcoin and crypto assets have the perception of broad swings, but market watchers have said that as of late, they have traded more in line with other risk assets, like growth and tech stocks. The argument is being made that cryptocurrencies are increasingly being adopted as mainstream investment assets.

Yale University economist Aleh Tsyvinski, co-author of a 2018 study that concluded that institutional investors should put about 1% to 5% of their portfolios into digital currencies, said individual investors comfortable with alternative investments, such as gold and private equity, should consider adding crypto, too.

“If you have 5% in alternatives, why not allocate 10% of that to crypto?” he said to the Wall Street Journal.

Also speaking to the Wall Street Journal, Boris Khentov, senior vice president of product strategy and sustainable investing at Betterment, said, “Absent more detail on an investor’s personal circumstances, we are not at all convinced that the 401(k) is where crypto belongs.” However, Bettermen said it plans to introduce a cryptocurrency investment for its individual investors later in 2022.

Khentov added that crypto is “something new” that merits caution of “a modest bet of something like 5% feels reasonable and prudent.”

Geoffrey Brown, CEO of the National Association of Personal Financial Advisors, a network of 4,400 fee-only advisers, told the Journal, “A lot of younger people are enticed by media reports and put money into crypto as a panacea for their future.”