Cryptocurrency advocates and those curious about it are suddenly discovering that asset management giant Fidelity will start allowing investors to deposit bitcoin in their 401 (k) retirement savings accounts. From a tax perspective, this seems an easy way for individuals to gain access to this emerging asset class in a favourable way. However, there are still some important factors to consider.
The service will be available to participants in Fidelity's employee-sponsored retirement plan later this year, but only if their employer chooses to offer it. Annual 401 (k) gains are tax-deferred, which eliminates the hassle associated with cryptocurrency investments and annual tax reporting.
According to the Wall Street Journal, the fees for investing in bitcoin in a Fidelity retirement account will be between 0.75% and 0.90%, plus those in the middle of the spot market fees offered by most major U.S. exchanges, including Coinbase, Gemini, Kraken, FTX and Binance USA. In addition, employees can only invest up to 20% of their current account balance in Bitcoin.
The only company that has signed up for the service so far is business analytics firm MicroStrategy, led by Bitcoin bullish billionaire Michael Saylor. It is the world's largest holder of bitcoin, with more than $5bn in inventory. Again, employers must agree to provide the service, but some may balk at the volatility of the asset.
In 2013, you could buy a Bitcoin for less than $300. Today, it's $40,000. While that's huge growth, it hasn't been smooth sailing. Bitcoin and other leading cryptocurrency assets have lost more than 50% of their value several times, and many of those losses occurred before the industry entered the mainstream. As many investors may recall, bitcoin approached $20,000 at the end of 2017, before losing 75% of its value in the following months. Bitcoin holders will argue that crypto assets recover more with each knockdown. Many also believe that riding the boom and bust cycle is a rite of passage, but it may not be for everyone.
While some may be thrilled that Fidelity is letting customers try their hand at bitcoin investments, governments may not be so happy. First, U.S. federal regulators have been very cautious about giving investors easy access to the crypto spot market, or even bitcoin. The US Securities and Exchange Commission has famously yet to approve bitcoin spot ETFs, although it has approved some products that offer exposure to bitcoin futures contracts, often because the market is vulnerable to fraud and manipulation.
When it comes to retirement planning, asset volatility has to be taken into account. Bitcoin has fallen nearly 40 percent from its all-time high of just under $70,000 in November, and retired and soon-to-retire people may not have the money or time to ride out these volatile cycles. Last month, the U.S. Department of Labor issued a notice expressing several concerns about investing retirement funds in cryptocurrencies. Chief among them are extreme market volatility, the emerging but murky regulatory landscape surrounding crypto assets, the inability of investors to make informed decisions, and the safety of holding crypto assets, which have been targeted by hackers. The department's concerns are important because it has a say in the regulation of employer-sponsored schemes.
In addition, Coinbase, the largest U.S. crypto trading platform, reportedly partnered with a retired company last July to offer a similar service. David John, senior policy adviser and deputy director of the Retirement Security Project at the Brookings Institution, told Forbes, "The crypto space itself is fascinating, and it was interesting when it started, but it's still in its early stages and definitely not suitable for retirement investing. The truth is, for retirement investments, the purpose should be growth and volatility should be limited. The older you get, the less you want your portfolio to go up and down because it makes it difficult to plan your retirement income."
While Fidelity is unique in asset management and retirement savings, there are other ways for people to get retirement savings into crypto territory. Companies such as Kingdom Trust, iTrust Capital and BitcoinIRA allow investors to buy digital assets through exchanges and hold them in individual retirement accounts. Additionally, in June, Coinbase partnered with ForUsAll to allow participants in employer-sponsored plans to buy dozens of different crypto assets and hold them in tax deferred plans.