Tommy Tuberville, a senator from Alabama, has presented legislation that would make it possible for 401(k) retirement plans in the United States to incorporate exposure to cryptocurrency investments.
In an announcement made on February 15, Tuberville stated that the Financial Freedom Act, which he had initially presented to the United States Senate in May 2022, aimed to reverse policy from the Department of Labor directing what type of investments were allowed in 401(k) plans, including cryptocurrency investments. Tuberville had initially introduced the bill. The senator claims that the proposed legislation would prevent the Department of Labor from initiating enforcement proceedings against those who “use brokerage windows to invest in bitcoin.”
According to Tuberville, the federal government should stay out of the business of picking winners and losers in the investment game. “By passing my legislation, I will assure that everyone who receives a wage will have the monetary freedom to invest in their futures in whichever manner they see appropriate.”
Tuberville shared the news that Senators Cynthia Lummis, Rick Scott, and Mike Braun had come forward to support the legislation and became co-sponsors. Following the collapse of the cryptocurrency market and the failure of major companies such as FTX, Voyager Digital, and Celsius Network, Lummis stated in an interview that she was “very comfortable” with the idea of U.S. investors including Bitcoin (BTC) in their retirement accounts. The interview took place in December 2022.
On the 14th of February, Politico published an article stating that Florida Representative Byron Donalds intended to propose a measure with the same name in the House of Representatives on the 17th of February. Donalds and Tuberville, both of whom are members of the Republican party, might run into resistance from the Democratic side of the aisle. Democratic Senator Elizabeth Warren has in the past voiced reservations over Fidelity Investments’ ambitions to integrate bitcoin in 401(k) accounts.
The notification issued by the DOL in March 2022 cautioned individuals who had 401(k) accounts that they should “exercise extreme care” when dealing with investments in cryptocurrencies. The letter cited the possibility of fraud, theft, and loss of assets. On February 7, a notice was issued by the Office of Investor Education and Advocacy of the United States Securities and Exchange Commission (SEC), the North American Securities Administrators Association (NASAA), and the Financial Industry Regulatory Authority (FINRA), all of which issued a warning that self-directed individual retirement accounts may include cryptocurrencies as potentially risky investments.
In a recent video he titled “Birthday Musings”, Charles Hoskinson, founder of the blockchain platform, Cardano has said he is not retiring anytime soon. He feels there is a lot at stake, hence leaving the company now is not the right option.
The 35-year-old founder condemned the activities of trolls and the constant attacks he keeps getting lately on social media. While he admits that it’s frustrating when people lie about Cardano’s progress, Charles is reluctant to throw in the towel just yet and will keep at it as long as there is something to win.
Recently Charles repurposed the verified Twitter page of Ethereum Classic to that of the Ergo proof-of-work network. His confiscation of the account that has served the Ethereum Classic community since 2016 was greeted by condemnation by many in the crypto Twitter community. Many believed the 600k Twitter handle belonged to the community and Charles was just a custodian.
Furthermore, the Cardano chief publicly severed ties with the XRP community after news of the brawl with Ethereum Classic made the rounds. The outspoken critic has been the target of many supporters of the XRP coin. According to his tweets, these XRP trolls continued to harass him unprovoked, forcing him to block most of them as he says he’s done with it.
The move sparked reactions in the crypto Twitter community with some users urging the Cardano chief not to stereotype the XRP community based on the actions of a selected few.
Meanwhile, the Cardano founder has said Blockchain technology could revolutionize government structures from the whelms of archaic processes to modern ones. With the recent video, it’s evident that Charles is in no hurry to join other top executives in crypto firms that have either retired or stepped down from their positions to pursue other possibilities.
In September, Jesse Powell, co-founder of crypto exchange Kraken, stepped down as Chief Executive Officer and was replaced by the firm’s Chief Operating Officer Dave Ripley. Also, Alexander Höptner, took over as CEO of BitMEX Exchange after Authur Hayes submitted his resignation last month.
Blockchain.News recently had a conversation with Mr. Vincent Chok, the CEO of Hong Kong-based First Digital Trust, a technology-driven financial institution powering the digital asset industry, to help explore whether the cryptocurrency can be considered a viable addition to pension funds.
Bitcoin as Game Changer against inflation for retirement
The global economic crisis is taking a toll on some of the major pension funds around the globe. They are either struggling to make payments for the monthly stipends, as agreed or having little funds to sustain a robust pay scheme.
Speaking to Mr. Chok in an exclusive interview, Chok told Blockchain.News that the issue of inflation has eroded the harvest of retired workers:
“In many countries, inflation is higher than what a pension will yield, where you’re earning 1-2%. It is better to invest in alternative assets in a diverse way, where you can buy property, Bitcoin, and access more. Pensions are long-term, and inflation hits hard-earned money, eating away at the value of money.”
Many users are tired of the traditional pension plans in many countries due to bureaucracy and many processes associated with accessing such funds. This has led to more agitation for a better alternative. Many employees are now looking to use cryptos like Bitcoin to save up for their retirement.
Pension funds in most countries are significantly underfunded, which has led many to attempt to make up the shortfall between plan assets and obligations through investments. This illustrates the potential adoption of digital assets if more pension funds continue to add exposure.
While this is a move from the status quo, many global pension funds appear not to be in a hurry to explore this option.
Growing Interest in Alternative Finance
Yet, several pension funds are looking for a change in the exploratory stage. Interest in investing in Bitcoin is growing in the industry. Firms are working to make it more accessible, as studies indicate that small allocations into crypto can yield favourable results.
In a comprehensive survey of almost 800 institutional investors across Europe and the US, 36% of respondents said that they are currently invested in digital assets, while 6 out of 10 believe digital assets have a place in their investment portfolio. Bitcoin continues to be the preferred digital asset with more than 25% of respondents holding the cryptocurrency.
A significant number of pension firms are increasingly investing in cryptocurrencies.
Bitcoin investment by Houston Pension Fund proved that cryptocurrency is not just appealing to individual investors. In October last year, the Houston Firefighters’ Relief and Retirement Fund (HFRRF) made a $25 million investment in Bitcoin and Ether, marking major news that a U.S. pension fund had put crypto directly on its balance sheet. Of course, $25 million was only a drop in the bucket compared to the $5.5 billion in total assets held by the fund – more precisely, representing just 0.5% of its portfolio.
The U.S. pension investment trend appears contagious as there is rising institutional demand from banks, hedge funds, private companies and even family offices in Europe and the rest of the world.
According to Chok, there is greater interest in and adoption of digital assets as a new investable asset class. The executive said there’s a lot of interest from companies to set up pension plans for employees, plus a lot of interest from banks to include digital assets and crypto into digital pensions.
Mr. Chok suggested that pension funds are often forgotten about but are an investment plan that everyone must have, usually by law. Governments force people to set up their pension accounts, put their money in, and then forget about it. Yields and returns of these investments aren’t lucrative.
“Bitcoin pension plans are for younger generations of people who can make tiny contributions that empower them to have far more diverse portfolios,” he said.
The Bitcoin retirement pensions not only help to provide education but also offer new opportunities than a mere 1-2% yield offered by government pension plans, Mr. Chok explained.
“We see this having the biggest impact on younger generations, who will start to think about their future, their retirement, through the easy accessibility of wealth generation mechanisms,” Mr. Chok stated.
The Bitcoin pension plan gives more hope that younger generations can set themselves up for the future while enabling them to learn about diversifying portfolios and various wealth channels that are accessible and which young people can participate in, he elaborated.
“Pensions are a boring topic as people aren’t talking about this at dinner. But these new programs – The bitcoin pension plan – enable people to be more willing to learn and provide greater awareness of access to capital, and greater financial inclusion. We’re proud to be able to offer and educate people on new opportunities for wealth generation,” Mr. Chok told Blockchain.News.
Risks Involved
Yet, Mr. Chok acknowledged that such enormous achievements and benefits offered do come with shortcomings. For instance, since Bitcoin is speculative and highly volatile in its current state, some entities and individuals believe its long-term investment case is weak.
In March, the Department of Labor, raised serious concerns about the prudence of a fiduciary’s decision to expose a 401(k) plan’s participants to direct investments in cryptos. The department, which regulates 401(k) plans, cautioned retirement plan managers to be judicious when it comes to cryptocurrencies.
However, The Internal Revenue Code (Code) and the Employee Retirement Income Security Act of 1974 (ERISA) do not explicitly prohibit the use of crypto as a 401(k)-investment option.
Mr. Chok told Blockchain.News that in July last year, BnkToTheFuture.com, the largest online investment community of professional investors investing in blockchain, fintech and Bitcoin companies, launched a retirement for investors seeking to incorporate crypto as part of their retirement portfolio and inheritance planning.
Despites its volatility, Bitcoin is also attracting attention from institutional investors. More large US pension funds are beginning to consider the unregulated asset as a potential asset class. The announcement by Fidelity Investments, the nation’s largest provider of 401(k) retirement plans, about launching Bitcoin as an investment option, raised significant curiosity among market participants.
The global Fidelity Investment is another major large retirement services platform that has started offering a Bitcoin 401(k) product. By this, the company is providing employees with a saving for retirement opportunity to add up to 20% of their pension balance to Bitcoin.
Despite the risks, at least one major employer – MicroStrategy business and software services company – has signed up to offer Fidelity’s new product to its employees.
In June last year, a small 401(k) provider called ForUsAll started allowing consumers to allocate up to 5% of their retirement funds into cryptocurrency.
Of course, the potential for significant wealth accumulation is the primary benefit of investing in cryptocurrency, plus there are other benefits.
Retirement plan sponsors are looking to provide the service based on customers’ demand. Offering cryptocurrency under a 401(k) plan would also relieve employees of the burden and headaches of holding and trading cryptos for themselves.
Empirical data shows that crypto components have the ability to significantly increase the yield of a pension fund portfolio, though such enhancement of yield comes at slightly higher risk levels.
According to Mr. Chok, “It’s not about putting 100% of your retirement fund into digital assets. It simply has a balanced portfolio. If you have 5% in crypto for example, a non-inflationary asset, and it appreciates over 30%, this will still have a huge impact on a portfolio without putting a dent on it if something were to happen to your chosen asset. So, the potential for upside is significant.”
“If you lost everything, it’s 5%. it won’t hurt your portfolio. You still have an account comparable to standardized government pensions.”
The executive said that the increase in risk can be mitigated by adding an actively managed crypto-component to the portfolio rather than a passive investment product.
Crypto Retirement Portfolio Outlook
Bitcoin is certainly an alluring investment opportunity because of the potential to make substantial profits. Nothing explicitly prohibits plan fiduciaries from offering the crypto under a retirement plan.
Employees and retirees can invest in Bitcoin through their IRAs as there is no legal prohibition against doing so. However, such employees and retirees should evaluate the risks and obtain professional advice through their preferred trading platforms while making such investments.
In the wake of the launch of a Bitcoin-focused 401(k) account- a retirement plan- in the United States by Fidelity Investments, two Senators – Elizabeth Warren of Massachusetts and Tina Smith of Minnesota, have expressed concerns over the company’s latest products and this was contained in a letter to the firm’s Chief Executive Officer, Abigail Johnson.
As contained in the Senator’s letter, a demand was placed on Abigail to explain some of the inherent risks that are associated with the launch of the Bitcoin-backed product to American workers. The senators demanded that Fidelity clarify the risks involved in the 401(k) investments and how the company will address these risks.
Additionally, the Senators demanded to know how the firm will address the susceptibility of Bitcoin to manipulation as well as “the additional Bitcoin risks identified by DOL, including the challenge for plan participants to make (an) informed investment.”
Fidelity’s push to extend the investment into 401(k) was said to be based on growing demand from employees. Despite the firm clarifying that it will charge no fees for the service, the Senators still demanded to know if the proposed customers would need to worry about any fees at all.
In the prior announcement, Fidelity said it would only permit about 20% of a particular client’s portfolio to be invested in digital currencies, however, the claim of popular demand has mainly been faulted by the Senators who wrote;
“Despite a lack of demand for this option — only 2% of employers expressed interest in adding cryptocurrency to their 401(k) menu – Fidelity has decided to move full speed ahead with supporting Bitcoin investments.”
It is not uncommon to find some Senators expressing dissatisfaction about anything relating to Bitcoin, drawing on the fact that it is a Proof-of-Work (PoW) coin with a high Carbon footprint. With Fidelity’s investment offering now being questioned, time will show whether true organic demands fueled the launch of the product or not.
The U.S. Department of Labor (DOL) on Friday warned employers and retirement plan providers to “exercise extreme care” before they consider cryptocurrency into their investment option for plan participants.
The labor agency made such comments as part of its efforts focused on protecting the retirement savings of U.S. workers.
The DOL said that cryptocurrencies like Bitcoin and other digital assets such as non-fungible tokens, pose significant challenges and risks to 401(k) investors, including, financial loss, theft, and fraud.
The Labor Department disclosed that financial services companies have started marketing crypto investments to 401(k) plans as retirement-plan option in recent months.
The labor agency warned that employers who add crypto investments to their company 401(k) plans might easily go against their legal obligations to plan participants.
Ali Khawar, acting assistant secretary at the Employee Benefits Security Administration, talked about the development and said: “At this early-stage in the history of cryptocurrencies … the U.S. Department of Labor has serious concerns about plans’ decisions to expose participants to direct investments in cryptocurrencies or related products, such as NFTs, coins and crypto-assets.”
Investing in Cryptocurrency
In September last year, the U.S. Department of Labor started working on guidance related to cryptocurrency. But the latest move by the DOL shows that the agency has followed the footsteps of other U.S. federal regulators that have recently highlighted risks that cryptocurrencies present to investors. The U.S. Securities and Exchange Commission (SEC) has a regulatory focus on investor risks related to cryptocurrencies.
Although the current law does not prohibit investing cryptocurrencies in 401(k) plans, many labor lawsuits (including a recent wave) have challenged the structure of the plan investment lineup, resulting in several plan sponsors favouring safer and less exotic and or volatile investments.
There has been pressure on retirement plan providers to favor stable, transparent, and low-cost investments such as index funds to avoid potential litigation. Recent lawsuits have examined how the Employee Retirement Income Security Act of 1974 (ERISA) regulates alternative investments like private equity or hedge funds.
Investing in cryptocurrency and crypto funds—which are much less stable or transparent than mutual funds—may still be far away from the investment universe of an ERISA plan.
“Many adults are struggling to save for retirement and feel that they are not on track with their savings. While preparedness for retirement increases with age, concerns about inadequate savings are still common for those near retirement age.” —Federal Reserve Website
Despite the Federal Reserve’s tone-deaf admission that many Americans struggle to retire when one of the central bank’s primary mandates is price stability, as of March 2021, there were approximately $35.4 trillion trapped in tax-advantaged retirement accounts. For many Americans, retirement accounts make up a vast majority of their overall net worth.
As the dollar continues to inflate and bitcoin continues to outperform any other form of savings, it’s natural that Americans will increasingly tap into their retirement savings to gain exposure to bitcoin. This is great news for bitcoin, but many risks emerge if these funds ultimately centralize in a few custodians’ hands.
Contrary to what many Americans might expect, anyone can hold the private keys to their bitcoin IRA instead of relying on a third party. However, navigating the US retirement rules and regulations can be difficult. This article can be used as a high-level starting point but nothing in this article should be taken as financial advice.
How U.S. Retirement Accounts Work
Retirement accounts (such as IRAs, 401(k)s, 403(b)s, 457 plans and others) allow contributions in the form of traditional funds, Roth funds or a mixture of both.
Traditional retirement account: Contributions receive an up-front tax deduction or exclusion from taxable income. Those traditional funds can be withdrawn after age 59.5 without penalty, but they will still be taxed upon withdrawal at ordinary income tax rates.
Roth retirement account: Contributions receive no up-front tax benefit. However, after age 59.5, all Roth funds — including all appreciation — may be withdrawn completely tax-free.
In either a traditional or Roth account, all capital gains and other investment income are free of tax as the assets grow.
Bitcoin: The Retirement Inflation Hedge
Historically, the 5 to 8% annual yield delivered by typical retirement accounts may have surpassed the real inflation rate of the dollar. Regardless, it definitely beat the official government-reported inflation rate. In 2021, however, there is no serious argument that such a yield is outpacing inflation.
Fortunately, today we have bitcoin, a revolution in savings technology with average yields over 100% per year when measured in U.S. dollar terms (past performance is no guarantee of future results). With its strict supply limit, bitcoin is an attractive savings vehicle for funds not intended to be touched for a few decades.
Unfortunately, marrying this new savings technology with traditional savings vehicles such as retirement accounts typically require significant trade-offs. Legacy retirement accounts, at best, might offer investments in the Grayscale Bitcoin Trust (GBTC) or stock in companies that hold large bitcoin reserves such as MicroStrategy (MSTR). But either of those options requires trusting the relevant institutions to actually hold all of the bitcoin they claim to hold (don’t trust, verify). And none of those investments grant savers access to any keys, putting the institutions in total control of your retirement’s destiny.
Enter The Self-Directed Checkbook IRA
Fortunately, a growing number of companies can help you use your retirement funds to buy bitcoin and hold the keys yourself. A self-custodied Bitcoin IRA combines the best of bitcoin self-sovereignty with retirement tax optimization.
Instead of leaving a large portion of your wealth invested in assets that are barely keeping up with inflation in a legacy IRA or 401(k), you can introduce bitcoin, the strongest currency that the world has ever seen, into your retirement portfolio by using just a couple of hardware wallets and completing some legal paperwork.
How Does A Bitcoin IRA Work?
The best bitcoin IRAs use a structure known as a self-directed checkbook IRA. This is an IRA that provides you with total control over your retirement assets. Unlike the first generation of self-directed IRAs, self-directed checkbook IRAs allow the underlying assets to be custodied by you instead of an IRA custodian.
Structurally speaking, in a self-directed checkbook IRA, your IRA owns one singular asset: an investment trust entity. That investment trust owns your underlying investment assets (in our case, bitcoin). Despite the investment trust being owned by your IRA rather than by you directly, you are sole named trustee. This means that you and only you are in charge of investment selection and custody.
Here are the five basic steps to convert a portion of your retirement to bitcoin and hold your own keys:
Set up an investment trust (the most common checkbook entity used today, although in the past sometimes LLCs were used instead).
Set up a custodial IRA account with a licensed IRA custodian that accepts checkbook-style investments.
Rollover (transfer) your legacy retirement account into the new IRA account and direct the IRA custodian to invest into your investment trust, which means they move your retirement funds into your trust’s checking account.
Onboard your investment trust with an exchange, linking the investment trust’s checking account.
Purchase bitcoin and secure it in cold storage with your private keys.
Common Questions About Self-Directed IRAs
Why not just liquidate the old retirement account to buy bitcoin?
Early withdrawals from retirement accounts come with taxes and steep penalties, sometimes up to 40%. Getting 40% more bitcoin today is significantly better than taking the tax hit. You’d also miss out on the tax benefits of holding bitcoin in a retirement vehicle.
Isn’t a retirement account antithetical to bitcoin?
Purchasing bitcoin in a retirement account while holding your own keys combines the sovereignty, permissionlessness, and savings power of Bitcoin with the lesser-known opportunities available in the legacy financial system. Even though your licensed IRA custodian technically holds the IRA, you hold the private keys to the bitcoin addresses. Not your keys, not your bitcoin.
Why not just wait for an ETF?
An ETF will not allow you to hold the private keys to your retirement. A centralized custodian will still hold your bitcoin. An ETF will be far less secure from remote hacks or custodial hacks and significantly more prone to confiscation. Further, future Bitcoin ETFs will most likely function as bitcoin derivatives lacking the safety of real bitcoin. It’s also worth noting that we’ve all been waiting for a bitcoin ETF since 2015, to no avail.
What’s the best way to do this?
The company I work for, Unchained Capital, has published a comprehensive guide with the KeyKeeper IRA team. Out of the available options for self-custodied IRAs, I’m confident we have the smoothest and fastest process to get a portion of your retirement accounts rolled over and bitcoin delivered to your cold storage.
However, there are other options for bitcoin IRAs out there. Here are four things to consider when investigating:
Can you hold the keys to your retirement account’s bitcoin?
What is the fee to purchase bitcoin and are there limitations to where you can buy it? Marking up bitcoin purchases is how many of these companies make their money.
What is the annual fee for the accounts and is there a charge based on assets under management? You don’t want your retirement accounts to get more expensive as the value of bitcoin increases.
What is the timeline from start to finish? It can be painful for your retirement funds to be out of the bitcoin market for extended periods if you try to exit GBTC.
What about privacy?
As with any IRA, the year-end value of a bitcoin IRA must be reported to the IRS annually. It is important to note that this disclosure is only of the U.S. dollar value of the holdings, not of any bitcoin addresses or other data. Regardless of whether you secure your bitcoin in collaborative custody with a provider like Unchained Capital, in your own multisig setup or with a single hardware wallet in a drawer, the reporting obligation remains the same. With this in mind, eliminating single points of failure with a collaborative custody vault has very little downside.
The annual reporting requirements are a trade-off when considering whether to set up a bitcoin IRA. But if you have existing retirement accounts that you want to rollover into bitcoin, the alternative is making an early withdrawal and paying the penalty, making the one-time privacy trade-off when purchasing bitcoin from an exchange, and ending up with up to 40% less bitcoin as a result.
Conclusion
U.S. retirement accounts are currently sitting on the melting ice cube of the devaluing dollar. Moving retirement assets into bitcoin opens up the opportunity to convert some of the $35.4 trillion stuck in these accounts to bitcoin secured by millions of private keys distributed among millions of Americans. This is the greatest untapped source of American “dry powder” that can flow into Bitcoin. Still, this transfer must be undertaken intelligently while educating savers about the benefits of holding private keys.
Controlling the private keys to your retirement is a large responsibility. But holding your private keys is the only reliable way to protect Bitcoin savings from hacks, inside jobs, central bank debasement, haircuts and confiscations. The process is consistently getting easier. Due to the superior security that comes with holding private keys, we believe over a billion people will hold the keys to their wealth within the next few decades.
Not your keys, not your retirement.
This is a guest post by Phil Geiger. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
Bitcoin-funded IRAs are surging in popularity in the U.S. as Americans seek a wealthier retirement.
Bitcoin-funded Individual Retirement Arrangements (IRAs) have surged in popularity in 2021, CNBC reported. Americans have flocked to retirement arrangements powered by Bitcoin as the Federal Reserve has steadily been increasing liquidity in the economy.
BitcoinIRA, a company launched in May of 2016 offering investors a tax-advantageous IRA coupled with the massive returns of bitcoin, currently has more than 100,000 individual account holders, the report said.
The thousands of workers who have chosen to invest their retirement accounts in bitcoin seek long-term gains in purchasing power for a more tranquil, and maybe anticipated, retirement. Additionally, they can also significantly reduce their tax burden compared to selling BTC if it was a personal investment.
But while Bitcoin IRAs can provide an interesting option for people – one whose returns will likely outpace that of other IRAs over time, it brings a critical tradeoff, especially as a long-term investment.
All bitcoin purchased by a BitcoinIRA account holder is held by BitGo, the retirement planner’s chosen third party for bitcoin custody. Consequently, the account holders do not possess actual bitcoin as it isn’t clear if they are given the choice for withdrawal.
To custody one’s own BTC is important because bitcoin is money – and you can only freely spend money that you own and hold yourself. Furthermore, since bitcoin is a nascent money early in its monetization path, exchanging it for dollars might not make sense 40 years from now.
As Bitcoin becomes more widely adopted and its principles and characteristics are tested and demonstrated over time, it might reach full monetization and become a widely adopted unit of account. In that case, dollars would be worthless, and the BitcoinIRA account holder would not be able to reap the benefits of holding bitcoin.
Therefore, a better approach could be saving for retirement in self-custodied bitcoin. The retired individual would enjoy true sovereignty by holding peer-to-peer, uncensorable, unstoppable money – something worth far more than dollars and tax cuts.
United States-based retirement plan provider, ForUsAll, is joining forces with Coinbase to allow clients to invest up to 5% of their portfolio assets in cryptocurrencies.
The pension provider, which primarily serves small-to-medium-sized businesses, is working to offer exposure to more than 50 cryptocurrencies in a product called Alt 401(k).
The firm’s co-founder and chief investment officer, David Ramirez, acknowledged concerns regarding offering crypto products in pension portfolios due to their volatility, but argued that U.S. citizens will be at a “disadvantage” if they are not given the option of accessing crypto assets in their retirement plans:
“The average American may be at a structural disadvantage relative to large institutions and high net worth individuals, and we just don’t think that’s right.”
ForUsAll handles $1.7 billion in retirement plan assets, which accounts for a small portion of the $22 trillion retirement-account markets.
In the United States, a 401 plan is an employer-sponsored defined-contribution pension account defined in subsection 401 of the Internal Revenue Code.
Larger institutional investment firms such as Fidelity Investments and Charles Schwab do not allow customers to directly buy or sell cryptocurrency in taxable accounts or individual retirement accounts. However, they can purchase shares in trusts that do invest in crypto assets from companies such as Grayscale Investments.
Related:Fidelity’s Tom Jessop says crypto has hit a ‘tipping point’
One firm that does allow the direct purchase of crypto assets and gold for retirement plans is BitcoinIRA, which was founded in 2016. Commenting on ForUsAll’s collaboration with Coinbase, co-founder and chief operating officer at BitcoinIRA, Chris Kline, stated:
“ForUsAll and Coinbase wouldn’t be doing this if there wasn’t a market. There are people that want this with these types of funds. And they want to have access to new and exciting things with their 401(k)s.”
MicroStrategy CEO Michael Saylor responded to ForUsAll’s move to embrace crypto.
If you invest 5% of your portfolio in #bitcoin, you have made the decision to invest 95% of your portfolio in assets getting demonetized by bitcoin.
— Michael Saylor (@michael_saylor) June 14, 2021
In April, Cointelegraph reported that pension funds and insurance firms have been increasingly dedicating part of their asset bases to Bitcoin and crypto assets as concerns over inflation escalated amid the coronavirus pandemic.
In May 2020, Kingdom Trust, a regulated custodian managing over $13 billion in assets, launched a retirement account supporting both Bitcoin and legacy assets.
The firm noted that when the Internal Revenue Service decided to tax Bitcoin, it directly enabled the asset to be held by qualified custodians and in retirement accounts.
Coinbase CEO Brian Armstrong is tapping into a new pool of customers by helping provide bitcoin for to certain retirement plans. Photo by Matt Winkelmeyer/Getty Images for Vanity Fair
Getty Images for Vanity Fair
Leading cryptocurrency exchange Coinbase has partnered with small-time 401(k) plan provider ForUsAll to offer employees crypto exposure through their retirement plans. Employees of participating companies will be allowed to use a “crypto window” — similar to the brokerage window offered in many conventional 401(k)s — to invest up to 5% of their retirement funds in over 50 cryptocurrencies including bitcoin, ethereum, and litecoin.
However, the announcement that cryptocurrencies will be included in some retirement plans has not been received warmly by many, including David John, a senior policy advisor at AARP Policy Institute and the deputy director of the retirement security project at Brookings. Though John is one of a rising number of traditional investors taking crypto seriously, he doesn’t think it has any place near workers’ retirement portfolios — at least not yet.
“Crypto itself is fascinating, and intriguing as it starts to develop, but it’s still in its early phases. And it is definitely not appropriate for retirement investing,” John says. “The fact is that for retirement investing, you want growth, and you want a limited amount of volatility. The older you get, the less you want your portfolio to gyrate up and down, because it makes it very hard to plan your retirement income.”
The goal of retirement accounts, for people of any age, he says, is to have earnings compound (tax deferred) over time and then to ramp down risk as one gets older — that’s essentially what target date funds, the default investment in a growing number of 401(k)s, do. While alternative investments such as commodities are sometimes a part of target date funds, they are typically counter-cyclical, meaning that they go up when the market goes down and vice versa. John says there is not yet enough data to determine if any crypto asset fits that bill.
“Yes, we can point out that there are points in time, where it’s correlated with this, that and the other index or asset or something along that line,” says John. “But we don’t know why at this point. And we don’t have a firm record that shows that this is a consistent pattern of behavior.”
Founded in 2012, San Francisco-based ForUsAll administers $1.7 billion in retirement fund assets for 70,000 employees — a tiny portion of the $21.8 trillion in defined contribution (meaning 401-Ks and IRA) retirement assets in the U.S. at the end of 2020. ForUsAll chief investment officer David Ramirez, says that more than 60% of the provider’s 400 employer clients have, over the past three months, expressed interest in the plans. The move also represents a new source of customers for Coinbase, which went public in April 2021 and is now valued at $46.29 billion.
Already investment opportunities featuring the original cryptocurrency bitcoin are growing popular through products like bitcoin IRAs offered by companies like CoinIRA or Bitcoin IRA. Even larger firms have started offering bitcoin as investment opportunities, if less directly. For example, Boston-based Fidelity investments, lets customers gain exposure to cryptocurrencies through products like the Grayscale Bitcoin Trust and Osprey. Fidelity launched a new Digital Assets platform in October of last year and recently filed with the Securities and Exchange Commission for a Bitcoin ETF.
“Relatively small allocations to cryptocurrencies may add material expected return benefits without materially increasing risk,” Rameriz says. “That is the magic of diversification. However, given the volatility of cryptocurrencies it is critical that we don’t just provide access, but also education, guidance and guardrails to help ensure investors use cryptocurrencies appropriately.”
While retirement expert John doesn’t think bitcoin is ready for 401(k)s, ForUsAll argues that not offering crypto exposure exacerbates structural inequality by not providing everyday investors with access to a source of investment gains for the wealthy. “Over 60% of professional investors now say that cryptocurrency has a role to play in their portfolios,” Ramirez wrote.“Leading institutions like Harvard, Yale and Brown already have exposure to cryptocurrencies. To exclude average retirement investors from this asset class will put them at a structural disadvantage.”
