What to Consider Before Adding Bitcoin to Your Retirement Savings

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Some investors may soon be able to add cryptocurrencies to their 401(k) accounts.

Fidelity Investments announced Tuesday it will begin allowing investors to put cryptocurrencies such as bitcoin in 401(k) retirement accounts, making it the first provider to do so. The offering will be available midyear for the 23,000 companies that use Fidelity for their retirement accounts. (Of course, your employer, as the plan sponsor, has to agree to it.)

Some investors may be wondering if cryptocurrencies have a place in their retirement savings. Many financial advisors say it can be part of a well-balanced investment portfolio, and have noted that clients have already been adding it to their investments outside of employer-sponsored retirement savings.

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"I think most retail investors are looking for exposure to something that just gives them the opportunity to participate in what they hope will be the appreciation of bitcoin over the long-term," said Douglas Boneparth, a certified financial planner and president of Bone Fide Wealth in New York. "And if this account accomplishes that, I'm elated to see that, I think it's wonderful."

What to consider before investing  

Of course, investors shouldn't rush to add bitcoin or other crypto assets to their 401(k) plans just because they can.

Instead, make sure that if you are going to add it to your retirement account that it fits into your long-term financial goals.

"If your time horizon is 10 years, I think now is a fine time to buy it," said Ivory Johnson, a CFP and founder of Delancey Wealth Management in Washington, D.C. Otherwise, he recommends that investors take a more holistic approach to the asset class instead of trying to time a volatile market.

Investors should have a clear reason for buying crypto instead of being pulled in only because the price dropped, he said. Reasons include seeing the asset as a store of value, viewing it as uncorrelated or wanting to own it because of the increasing rate of adoption.

Before jumping in, people should be conscious of how much of their total portfolio is invested in cryptocurrencies and make sure the allocation matches their risk profile, Johnson said. New investors should have a firm grasp on how much they're willing to risk before they buy.

"If you put 20% in crypto and you can't stomach volatility, you've got what's known as a problem," he said. "But if you've gone 1% or 2% or 3%, it's not as big of a hit to your portfolio."

Fidelity has some guardrails in place to keep investors from putting all of their retirement assets into cryptocurrencies. The plans will let account holders invest up to 20% of their savings in bitcoin, an amount that plan sponsors can reduce.

What to expect while you're investing

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Investors should expect cryptocurrencies will continue to be volatile. Bitcoin has trended down, losing 40% of its value since hitting a record high near $69,000 in November.

What's more, the historically risky asset hasn't been tested in an environment like the one we're seeing today, where interest rates are set to rise, according to Johnson.

"You should fully expect that [crypto] will go down further, so only put in what you can afford to lose," said Tyrone Ross, CEO of Onramp Invest, a crypto-asset platform for financial advisors and firms. "If we wake up tomorrow and it goes to zero, you should be able to still pay your rent."

Before putting money into crypto, both experts stressed the importance of having a secure personal financial situation and clear investment plan.  "If you dollar-cost average on the way down and also on the way up, it will smooth out that volatility and also enhance returns," said Ross.

Having access to bitcoin and other digital assets in a 401(k) will likely make these kinds of investing moves much easier for investors, said Boneparth.

"A 401(k) is a way a lot of people invest their money and it's their first exposure or only knowledge when it comes to investing," he said. Having access to bitcoin in such accounts will "certainly help with indoctrination and getting people exposure to the asset class," he added.

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