Cryptos are now in 401(k)s. Are they the right investment for your nest egg?

·7 min read

It’s no longer just celebrities, billionaires and digital-asset enthusiasts who are dabbling in the crypto craze. Cryptocurrencies are coming to retirement plans soon.

A small group of workers next month will be able to invest in cryptocurrency in their 401(k), The Wall Street Journal reported Thursday.

ForUsAll Inc., a 401(k) provider, announced earlier this month a deal with the institutional arm of Coinbase Global Inc., a leading cryptocurrency exchange, that will allow workers in plans it administers to invest up to 5% of their 401(k) contributions in bitcoin, ether, litecoin, and others, the Journal reported.

Crypto-investing is virtually nowhere to be found in 401(k) plans and individual retirement accounts at the moment. But while financial advisers remain cautious about cryptocurrencies, they may be ready to embrace them due to client demand, according to the 2021 Trends in Investing Survey, conducted by the Journal of Financial Planning and the Financial Planning Association.

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Cryptocurrencies were first added to the survey in 2018 when just 1.4% of advisers indicated they were currently using or recommending them with clients. That percentage dropped to below 1% in 2019 and 2020, but has increased to 14% of advisers currently using or recommending cryptocurrencies in 2021.

More than a quarter (26%) of advisers indicated that they plan to increase their use or recommendation of cryptocurrencies over the next 12 months, according to the survey. About 49% of them signaled that clients had asked them about investing in cryptocurrencies in the last six months, up from 17% in 2020.

“It is clear from these results that we’ve reached an inflection point in the wealth management space,” Tyrone Ross, CEO of Onramp Invest, a cryptoasset platform, said in the report. “Advisers are now faced with a client base that demands knowledge, access and advice from their adviser on cryptoassets.”

Billionaires, celebrities and athletes can’t get enough of the crypto craze, USA TODAY has reported. Should you jump in on the mania, too? It depends on how much you can tolerate extreme volatility in your portfolio.

Here's what financial experts say:

What are cryptos?

Cryptocurrencies are digital currency created and exchanged over a decentralized computer network where transactions are secured and verified through coding.

Bitcoin, which launched in 2009, is the original and the world’s most popular crypto. It was designed as an alternative to government money and is based on blockchain technology, which acts as a public ledger of transactions.

Bitcoin’s value depends on investors’ confidence in it because there is no central authority governing supply. It has mainly been used for speculation by traders rather than for payments.

Prices for cryptocurrencies are based on supply and demand. That means the rate at which a cryptocurrency can be exchanged for another currency can fluctuate vastly since the design of many cryptocurrencies ensures a high degree of scarcity.

Cryptocurrencies aren't a currency supported by governments, and they aren't a piece of a company, like a stock. The factors that determine their underlying worth are unclear, experts say.

What drove the crypto-mania in 2021?

A number of factors are driving the crypto craze in prices.

With the stock market at record highs, interest rates at historic lows and real estate prices strengthening, investors are looking for more ways to generate returns and diversify their portfolios, according to experts.

Investment banks like Morgan Stanley and rival Goldman Sachs have offered some of their wealthiest clients access to Bitcoin funds.

The debut of Coinbase as a publicly traded company in April attracted both day traders and new amateur investors and helped spur a rally in cryptocurrencies, pushing virtual tokens like Dogecoin, bitcoin and ether to record highs in the spring. The exchange was founded as a simpler way to trade digital coins.

To be sure, bitcoin has shed roughly 40% of its value in just two months after hitting an all-time high in April.

The surge in popularity of “memecoins” like Dogecoin follows a boom in retail trading during the coronavirus pandemic as more people work online. Those same factors spurred interest in “meme stocks” like GameStop.

Dogecoin has ridden a similar Reddit-driven wave as stocks like GameStop and AMC in recent months, accelerated by a series of tweets by tech billionaire Elon Musk, who was pumping the cryptocurrency. Earlier this year, Dogecoin soared following enthusiasm from a Reddit group called r/SatoshiStreetBets, which aims to jack up the prices of cryptocurrencies.

Musk, who has more than 56 million followers on Twitter, has driven traders into frenzies by mentioning Dogecoin at times.

Are cryptos right for you?

First-time investors should proceed with caution. Piling all of your nest egg into something as volatile as cryptocurrencies poses big risks to your retirement, experts say. Wealth managers and finance experts have long been skeptical of these speculative investments for amateur investors due to their extreme swings.

In 2013, bitcoin began trading around $13 and spiked to more than $1,000 by December. In late 2017, the digital token surged to nearly $20,000, before crashing to almost $3,000 the following year. What followed was a dizzying rise to above $64,000 in April 2021.

Dogecoin has seen similar booms and swoons.

But that hasn't stopped non-professional investors from throwing themselves into the mix.

Like other investments, such as SPAC (special purpose acquisition companies) cryptocurrency has a mass following on social media sites.

What are the risks?

Crypto bears are skeptical that digital assets will become a common form of payment even though some businesses are accepting it.

There have also been growing concerns about a regulatory crackdown on bitcoin. Turkey’s central bank banned the use of cryptocurrencies from the end of April, saying crypto payments came with “significant risks.”

India is also reportedly set to propose a law banning cryptocurrencies, fining anyone trading in the country, or holding such digital assets.

But bitcoin has also found acceptance. El Salvador’s congress made bitcoin legal tender this week. Some 500 fishing and farming families in the small Central American nation use bitcoin to buy groceries and pay utilities, something the government envisions for the country at large.

But new investors in cryptocurrencies need to be careful of scammers, experts say.

The Securities and Exchange Commission agrees.

The SEC in recent years has issued several warnings for investors to “watch out” for fraudulent digital asset and crypto trading websites, and there have been dozens of criminal charges brought against alleged fraudsters.

The agency charged or settled at least 23 cases last year and five this year involving alleged cryptocurrency fraud.

How can you protect yourself?

The sharp rise in the value of bitcoin this year has some analysts worried about a potential bubble in the cryptocurrency market, with bitcoin's price – at one point – more than doubling since the start of 2021.

More wealth advisors, however, are starting to take these alternative investments seriously. Their clients are asking how they can incorporate cryptocurrencies into their portfolios to generate more money for their nest eggs.

That’s because cryptocurrencies stand to benefit from a massive generational wealth transfer over the next decade, experts say. By 2030, millennials will hold five times as much wealth as they have today and are expected to inherit over $68 trillion from their predecessors, according to a study by Coldwell Banker Global Luxury.

Analysts at Fundstrat Global Advisors, an independent research firm that provides market strategy, have advised clients who are more conservative with their investments to allocate between 2% to 5% of their portfolio in crypto, with 80% of that toward bitcoin and 20% toward Ethereum.

Fundstrat managing partner Tom Lee recently upgraded his bitcoin price target from $100,000 to $125,000 by year-end.

For those who want to be more aggressive, Fundstrat recommends that they use up to 10% of their total portfolio allocation toward crypto, though some younger investors could go a little higher than that if they’re willing to accept the risk.

Investors should buy and hold because investing in cryptos is a multi-decadelong play as investors wait for the societal and technological shift to take place.

When it comes to cryptos, investors should stick to a rigid investing plan by using a dollar-cost average approach, experts say. From there, they can determine how much they want to invest, their allocation and a time frame they’re comfortable with to help them ride out bumps along the way.

Contributing: Craig Harris, USA TODAY; The Associated Press

This article originally appeared on USA TODAY: Cryptocurrency: Are they the right investment in 401(k)s?