isn’t a HODLer. You probably shouldn’t be one either.
The Treasury Secretary said last week that it would be reasonable for Congress to regulate whether cryptocurrency belongs in retirement accounts. At the moment, digital assets fall into a legal gray area when it comes to pensions.
Back in March the Labor Department, which regulates Americans’ retirement savings, tried to set some boundaries without introducing new rules. It reminded retirement plan administrators of their fiduciary duty, expressing “serious concerns about the prudence” of putting cryptocurrency into a retirement plan. In the context of pensions, that wording carries special meaning: Someone who breaches that duty can be held personally liable for losses suffered by retirement savers.
The warning wasn’t chilling enough for Fidelity Investments, which administers retirement plans for around 23,000 companies. It said in April that it would allow plans to offer Bitcoin in the future. This month much smaller provider ForUsAll, which announced a crypto 401(k) last year, upped the ante by suing the Labor Department over the issue. After Labor Secretary Marty Walsh said this week that formal rules restricting crypto were under consideration, Chief Executive Jeff Schulte said in a release that the Department “has no authority to pick winners and losers by attempting to ban entire asset classes.”
Except it already does. Collectibles such as stamps, coins, rugs or antiques have long been verboten. The rules were written before people paid hundreds of thousands of dollars for a JPEG of an ape, but such investments certainly would violate the spirit of the rule too. The one exception to the ban on owning collectibles, and only under strict circumstances, has been precious metals.
It isn’t hard to see why unleashing mom and pop’s retirement savings on crypto has fans of the asset class salivating. As of last September, defined-contribution plans—IRA and 401(k) type accounts—held about $37 trillion in assets. The combined market value of the two leading cryptocurrencies, Bitcoin and Ethereum, is just over half a trillion after their recent selloff.
All investments carry risk, but the first big company that plans to allow Bitcoin in employee retirement accounts,
with its chief executive officer,
quoted in Fidelity’s press release, was an unfortunate choice to assuage regulators’ fears. The enterprise software firm has recklessly bought almost $4 billion in Bitcoin for its own account, borrowing money for part of it. As of Thursday, Microstrategy’s market value was just $1.8 billion and its stock price was down by about two-thirds just since Fidelity’s announcement. Mr. Saylor’s response to Bitcoin’s recent swoon was to post a picture of himself on Twitter with laser eyes, a signal of bullishness in the online crypto community. He also said that Microstrategy could “continue to #HODL through adversity,” a reference to the “hold on for dear life” maxim that committed crypto investors cling to in tough times.
Two decades ago Enron became the poster boy for how not to run a 401(k) plan when it was revealed that 60% of its employees’ nest eggs were in its worthless stock. Linking your job security with your retirement is now accepted as reckless and less than 5% of 401(k) assets are in company stock. Microstrategy, which didn’t respond to questions, would open its employees up to similar risks since its share price, and possibly its solvency, is tied to Bitcoin’s value.
And volatility isn’t the only risk. On Sunday crypto lender Celsius Network froze withdrawals and The Wall Street Journal reported that it has hired restructuring lawyers. And Crypto exchange and brokerage
which acts as a custodian for ForUsAll, warned in a May securities filing that, unlike with a broker holding stocks or mutual funds, client assets might not be shielded if it goes bankrupt. A ForUsAll spokeswoman says Coinbase’s institutional business “provides additional legal protections and safeguards intended to protect client assets in the event of any potential bankruptcy.”
Stacked against all the hazards, there might be some reasons for allowing retirement savers to own a limited amount of cryptocurrency. One is the core investing concept of moving out on the “efficient frontier”—making a portfolio less volatile for the same amount of return by adding uncorrelated assets. Lately Bitcoin has acted like a tech stock on steroids, magnifying market risk. But it could well march to its own drummer in the future.
On the other hand, regulators’ reasons for restricting collectibles might apply to Bitcoin too. Like a rare painting you aren’t even allowed to hang on your wall, its investing appeal is that someone will decide it is worth more in the future than what you paid. Traditional assets like stocks, bonds and real estate produce cash flows, making it possible to value them. And, unless Bitcoin makes money obsolete, cash is what you will need to live on once retired.
Shouldn’t people be allowed to take a flier with their own savings? They already can, but maybe not with retirement funds subsidized by taxpayers. Even fewer options might save people a lot of money and grief.
Retirement giant Vanguard, in a study published last year, said that 8% of its 401(k) clients have extreme allocations—all stocks or all bonds. More than a third contributed less than their company match, forgoing free money, and 13% had borrowed from their accounts, potentially denting returns. And some investors panic-sell when stocks tumble—something that might happen more frequently with a volatile asset than a mutual fund.
With most Americans saving too little or not at all, America already faces a retirement crisis. Bitcoin won’t solve it and could well make it worse.
Write to Spencer Jakab at firstname.lastname@example.org
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