2021 was the year that cryptocurrency became a mainstream asset class, with traditional financial institutions unable to ignore the asset class’s potential. Despite this, mixing bitcoin and 401(k) plans is currently a terrible idea. The reason being, according to Madeline Hume, a senior research analyst for Morningstar, is that crypto “is still very much a speculative asset.”
“At this point, the asset class lacks academically substantiated valuation models. Stocks have free cash flows and bonds have loan principals that can be modeled and give these securities their value,” writes Hume. “Bitcoin has neither, and that makes it too volatile for direct investment through a 401(k).”
The way cryptocurrencies move over time and across market cycles flies in the face of established market dynamics. After studying the behavior of a diversified basket of cryptocurrencies, Morningstar found that the only asset class that had the same level of volatility was oil futures. An asset as volatile as oil futures has no place in a portfolio of retirement savings.
There’s also the liability issue to consider. Employers could get sued for offering crypto as an investment option for employees’ 401(k)s, making the asset pricey as well as volatile.
While investors saving for retirement may be tempted by the allure of bitcoin’s uncorrelated returns, putting bitcoin in a 401(k) plan in the hopes that it may pay off is not unlike going to the casino and hoping to win in a game of Texas Hold ’em. If you hit it big, it’s an uncorrelated return stream. That doesn’t make it investing.
Ultimately, crypto, aka “digital gold,” is not a silver bullet for successfully saving for retirement. As Hume writes: “The recipe for success in retirement saving is unchanged and has only three ingredients: time, diversification, and compound returns.”
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