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Your 401(k) Retirement Account and Bitcoin ETF: Do the Benefits Outweigh the Drawbacks?

The SEC has okay'd crypto for retirement savings.

American savers will now have the opportunity to include digital assets in their retirement savings accounts. The new changes follow the Securities and Exchange Commission (SEC) ‘s approval of eleven Spot Bitcoin ETFs.

Introducing these investment vehicles would allow savers to include a percentage of digital assets, specifically Bitcoin, within their retirement savings account without purchasing cryptocurrency. This would help individuals minimize their risk exposure while having the opportunity to contribute significantly towards an ever-emerging digital marketplace.

Despite the new rulings that could see individuals and employers having the option to include Bitcoin ETFs as options for 401(k) retirement saving plans, previous guidance provided by the U.S. Department of Labor has raised “serious concerns” regarding crypto-based assets in employer-sponsored retirement plans.

Buying crypto, even for beginners may seem daunting at first. However educating yourself, understanding the risks, and having the ability to manage volatility effectively may ensure that digital assets can provide your retirement plan with significant upside potential.

More than this, newcomers should be aware of the various cybersecurity requirements and crypto taxes, which are currently being taxed similarly to stocks. The crypto market is currently an exciting opportunity for individuals with enough financial leverage to undertake risk exposure; however, these assets can be highly speculative and may come with increased market volatility.

Understanding the potential drawbacks of these investment vehicles will help individuals make more informed investment decisions and could help drive positive near-term portfolio performance.

Read further as we discuss how including crypto-based assets such as BTC ETFs could help bolster your retirement savings, and what are some of the drawbacks individuals should be aware of before diving into the world of cryptocurrency.

What is a Spot Bitcoin ETF?

A Spot Bitcoin Exchange-Traded Fund or ETF allows retirement savers to experience digital currency assets without physically holding or owning any cryptocurrencies. Instead, the fund tracks the performance of Bitcoin, allowing savers to purchase shares of the fund.

As with ordinary ETFs, these funds are managed by asset managers who typically hold Bitcoin or other cryptocurrencies. They are held against their immediate value or “spot” value as the underlying asset.

Unlike traditional stocks, bonds, or equities, fund managers can leverage various financial instruments to allow funds to work in tandem with Bitcoin performance and to lower further any volatility that individuals may experience.

With a Spot Bitcoin ETF, savers can make a return on the price of Bitcoin. However, there is a slim margin between the actual price of Bitcoin and the value of ETF share prices. This is important to remember, as Bitcoin’s price is highly volatile and continuously fluctuates in value.

Bitcoin ETF vs. Bitcoin IRA

For American retirement savers, investing in cryptocurrencies or at least partially in any digital asset allows them to diversify their retirement savings and access various capital structures within the market.

Additionally, a Bitcoin IRA, considered a self-directed individual retirement account, makes it possible for individuals to invest in Bitcoin. Although these accounts provide savers with the ability to access capital markets that are an alternative to traditional retirement accounts or investments, there are some important considerations:

  • Individuals are in charge of making important investment decisions.
  • The significant price volatility of Bitcoin places a significantly high risk on these accounts.
  • Opening an account may be free, but account management may include additional fees.
  • Custodians might not have a fiduciary responsibility towards savers or investors.
  • Digital currencies remain primarily unregulated by federal agencies.
  • Savers must own a crypto wallet or key to access their investments.

These accounts are self-managed, meaning that individual savers must manage their funds and exercise fund allocation to ensure positive growth.

Unlike a Bitcoin ETF, these accounts are typically high-risk options, yet they could potentially provide significant upside for retirement savers over the long term. However, the near-term outlook typically provides less sufficient returns and could be more challenging to justify against better-performing and safer investment options such as stocks, bonds, or mutual funds.

Another consideration is that digital assets such as cryptocurrencies are still mostly unregulated in the United States. Although new developments have meant that newer investment vehicles can be introduced onto the market, the physical rules and laws surrounding the ownership of cryptocurrencies are still somewhat faded, and more clarity is required to ensure safer transactions for all investors.

Benefits of including Bitcoin ETF in retirement savings accounts

For many people, directly investing in cryptocurrencies, including Bitcoin, remains a seemingly impossible opportunity, often riddled with high uncertainty and risk. Fortunately, investing in Bitcoin can be easier with a Spot Bitcoin ETF, providing a significant upside to your retirement savings account.

A hedge against inflation

Crypto such as Bitcoin is often considered as a hedge against inflation, similar to investing in commodities such as gold. For individual savers, this could mean that Bitcoin or a Bitcoin ETF could preserve its purchasing power in the long run, helping to bolster retirement savings.

Factoring for inflationary concerns is one of the biggest drawbacks for many savers, as 69 percent of individuals have not been able to contribute to their retirement savings in recent months due to the inflationary pressure, according to a recent survey.

Provides account diversification

Traditionally, retirement accounts hold a combination of stocks, bonds, or mutual funds. By providing necessary asset diversification, individuals could increase their investment returns while minimizing their risk of unforeseen market changes.

Additionally, with a Bitcoin ETF, savers can include a unique digital asset class in their portfolio, allowing them to access new market opportunities. As with traditional markets, digital asset classes are continuously growing, with more fund managers entering the market and further diversifying individual class options.

Positive market outlook

Equity markets fluctuate constantly as wider economic developments such as inflation, interest rates, employment, geopolitics, and investor confidence can influence their performance.

Similarly, the positive side of investing in an ever-evolving market is that investors can leverage a market opportunity that could see $150 billion being invested into Bitcoin ETFs over the coming years. This is evident in recent developments that have seen investors pouring more than $1.9 billion into nine of the eleven SEC-approved Bitcoin ETFs within the first three days of trading.

While it’s important to consider the potential high risk of investing in Bitcoin ETFs or alternative asset classes, the long-term projection outlook could see more investors and fund managers allocating capital towards digital assets and fueling price performance.

Improved 401(k) exposure

Employer-sponsored 401(k) accounts now have additional exposure to new asset classes, helping to drive employee sentiment and potentially reflecting on employers’ ability to respond to their workers’ direct needs.

In 2022, Fidelity Investments, one of America’s latest 401(k0) plan administrators, added a Bitcoin option for employees with significant risk leverage. This addition enabled employers and employees to choose their asset allocation and further ensured that individuals could invest in cryptocurrency within their company-sponsored 401(k) plan.

These progressive changes would mean that employers could effectively respond to employee demands, further improving worker morale and demonstrating the ability to allow employees to tap into various capital opportunities.

High-value return

In November 2021, Bitcoin made history after peaking at $67,000, and again in early March 2024, after the crypto managed to surpass its earlier record, reaching a value of more than $72,000.

Already this year, Bitcoin performance has improved by nearly 48 percent, and over the past 12 months, prices have soared by more than 132 percent. This performance is not easily seen with other asset classes or digital currencies, for that matter.

Many experts argue that Bitcoin’s history of potentially high returns, not just in recent years but over the last decade, has outperformed traditional asset classes. More than this, some believe that crypto diversification and the onset of a Spot Bitcoin ETF could further enhance the growth of retirement savings accounts and help provide them with a more robust capital structure over the long term.

Drawbacks of including Bitcoin ETF in retirement savings accounts

While there are numerous upsides to adding Bitcoin ETFs to your retirement savings, these opportunities aren’t without their potential drawbacks.

Inability to understand fact vs. fiction

Many savers often rely on external information, data, and market insight to make the necessary adjustments to their retirement savings. This may include individual activities or leveraging the services of a fund manager. Additionally, company-sponsored 401(k) savings accounts may often limit or restrict some individuals from deciding on fund allocation, which might limit growth opportunities.

Nonetheless, the U.S. Department of Labor has expressed a “serious concern” regarding including crypto or crypt-based assets in employer-sponsored retirement saving plans.

More than this, the Department of Labor claims that many individuals are often limited to making sound or informed decisions due to the nature of above-market returns and the attention these investment assets generally draw. This could lead to individuals incurring higher losses due to limited access to information or fully understanding the risk of losses, leading to the inability to separate fact from fiction.

Extreme market volatility

As with any investment class or asset, volatility can be expected during ordinary market cycles. However, the case with Bitcoin and other cryptocurrencies tends to be slightly different, with investors often navigating these assets’ extreme volatility and speculative nature.

These massive price swings can lead to a significant loss in retirement account value, which may increase the risk of savings growth for individuals nearing retirement.

Unlike traditional investments such as stocks, Bitcoin is more sensitive to economic, social, and political circumstances. For instance, in June 2021, Elon Musk, CEO of Tesla, shared a tweet on X, formerly Twitter, that he had “fallen out of love” with the world’s leading crypto. The aftermath sent Bitcoin prices tumbling 4.3 percent.

This is only one of the many examples that showcase the high price volatility of Bitcoin, and seeing as a Bitcoin ETF would closely track price performance, both near and long-term gains are not necessarily always promised.

Unbacked by government securities

For decades, lawmakers have struggled to determine whether they should fully recognize Bitcoin and other digital currencies as legal tenders in the United States. Although there has been some recognition of digital currencies in recent years, most of these assets are not backed or supported by the U.S. government.

For example, the U.S. dollar is widely recognizable and supported legal tender used worldwide to complete transactions. Additionally, as the official fiat currency of the United States, the government often develops and introduces significant economic policies to uphold the dollar’s credibility, value, and strength.

Even government entities such as the SEC, which approved eleven Spot Bitcoin ETFs earlier in the year, have clearly communicated that despite the approval of ETF listings, they do not approve or endorse Bitcoin. These conditions could mean that if Bitcoin prices fall sharply, investors could lose a sizable share of their portfolio value or that retirement savers could see several years of savings being wiped from their savings.

Cyber and digital security risks

Considering that cryptocurrencies are mostly purchased and stored via a digital brokerage account such as Coinbase, Gemini, Webull Pay, or, among others, holders typically run the risk of having their wallets hacked by malicious cybercriminals.

Last year, money lost to crypto fraud totaled more than $3.9 billion in losses, up from $2.57 billion in 2022, according to the FBI’s Internet Crime Report 2023. The increase of more than 53 percent means that more and more people are becoming victims of high-profile crypto scams, leading many to lose thousands, if not millions, in savings each year.

For the average person, incurring some losses might not be detrimental to their retirement savings. However, losing any percentage of their retirement savings can make a massive difference in the long run for older individuals who are a few years from retirement.

Small retirement contribution

Despite crypto’s high risk and volatility, many experts believe that individuals should only allocate between 5 and 10 percent of their portfolios towards alternative assets, including Bitcoin ETFs.

Based on these recommendations, retirement savers would have only a very small percentage of their portfolios directed toward alternative assets. Additionally, this could mean that savers will have a shorter period at which they can increase their earnings from alternative investments, especially Bitcoin ETFs, which are still relatively new to the market.

While broader diversification of retirement savings is essential, it would be in the best interest of savers to allocate these funds to more fruitful investment options, such as stocks, bonds, or mutual funds, that provide them with a more mature capital return.

Limited historical performance data

Although some historical records of cryptocurrencies’ broader performance are available, not enough historical performance data is available to help accurately predict the estimated delivery of Bitcoin ETFs.

Fund managers could use data related to Bitcoin’s overall performance throughout recent years to develop a suggested estimated return. However, these estimates are loosely based on supplementary information and do not necessarily translate Bitcoin ETFs’ actual or physical performance.

Not having clear foresight could mean that savers expose themselves to higher financial risks that could negatively impact their retirement savings. Instead, it would be best for savers nearing retirement to minimize their exposure and focus on allocating available funds toward higher-growth investment vehicles.

Additional management costs and fees

Another factor to consider is that Bitcoin ETFs are a relatively niche asset class operated by only a handful of fund managers. These fund managers all have various fee structures in place, potentially influencing the overall outcomes of a person’s retirement savings.

For instance, firms may charge a set annual percentage or require savers to pay a quarterly fee based on the fund’s performance. Blackrock, the world’s largest asset management firm, charges 0.25%, while others, such as Grayscale and Ark Invest, charge 1.5% and 0.21%, respectively.

Other firms have completely waived their fee management structure until the maturity of assets, although other unknown costs could be involved in managing these funds, such as brokerage costs, high transaction costs, or limits on withdrawals.

While these costs might not seem significant in the short run, management fees can become a burden on savers looking to get the most from their retirement plans over time.

Should you invest in Bitcoin ETFs for your 401(k)?

Retirement planning can be challenging, and while people need to consider all the necessary options, making the right investment decision can help them ensure the longevity and safety of their retirement savings without having to incur substantial risks or losses.

While it’s important to exercise caution when investing in alternative assets, individuals are advised to consider additional factors when buying Bitcoin ETFs. These factors include:

Risk tolerance: Each person might have a different risk tolerance, which could affect the bottom-line performance of retirement savings. A person who can tolerate higher levels of risk might be more open to investing in Bitcoin ETFs, while those with lower risk tolerance might be subjected to staving off as much risk as possible.

Financial objectives: A person might invest to leverage market opportunities and grow personal retirement savings, and a Bitcoin ETF might provide the necessary financial leverage to help boost their objective. However, it’s important to consider both long-term and short-term objectives when determining retirement savings plans.

Ability to carry losses: Similar to risk tolerance, those individuals who may have a higher level of risk exposure or who might be more comfortable with having less risk exposure need to consider how much of the losses they can carry in the event of a market turndown. This could mean individuals should have enough capital to support their losses.

Making up for time: Finally, investing in Bitcoin ETFs shouldn’t be for making up for lost time. You might find that you have become much more conservative in recent years as you approach retirement. This would mean that investing in high-risk and volatile assets could influence the overall growth of your savings, both positively and negatively.

Final Thoughts

Spot Bitcoin ETFs allow American retirement savers to access alternative digital assets and investment vehicles that can help drive the financial growth of their retirement savings without having to learn the complexities of owning and storing Bitcoin.

Nonetheless, these assets are highly sophisticated and require careful consideration before introducing them to your retirement savings plan. Keep your savings objectives in mind, as this can help you determine whether a Spot Bitcoin ETF is the right choice for you and your retirement savings.

Additionally, make sure to leverage available resources or consult with a broker beforehand. While Bitcoin ETFs may provide an exciting new opportunity to diversify your retirement savings, they are not designed for every or any saver, and anyone looking to purchase these instruments should exercise extreme caution when doing so.

Although there may be some drawbacks to including a Spot Bitcoin ETF in your retirement savings, this instrument may provide increased market exposure, a new way of retirement diversification, and perhaps bring savers closer to better understanding the long-term value of digital assets.

Featured Image Credit: Photo by David McBee; Pexels

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Stock Risk and Financial Technology Writer
Pierre Raymond is a 25-year veteran of the Financial Services industry. Driven by his passion for financial technology he has transitioned from being a quantitative stock picker, to an award-winning hedge fund manager, credit risk manager to currently a RISK IT Business Consultant. Pierre is the cofounder of Global Equity Analytics & Research Services LLC (GEARS) and a current partner at OTOS Inc.

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