The federal government’s guidance for workers considering including bitcoin or any other cryptocurrency in their retirement investments is to refrain from doing so.
The advice is not new at all. Plan sponsors were initially cautioned by the Department of Labor in March to exercise utmost caution before allowing cryptocurrency investments in employer-sponsored retirement options like 401(k) plans.
“These investments present significant risks and challenges to participants’ retirement accounts, including significant risks of fraud, theft and loss,” the agency said.
The field is brimming with charming prodigies, deceitful schemers, and so-called financial advisors endorsing financial products with limited or no clarity.
In a letter addressed to Fidelity Investments, Democratic Senators Elizabeth Warren, Dick Durbin, and Tina Smith expressed their views.
The risks for investors in the cryptocurrency markets have increased even more since that time.
The collapse of FTX, a leading crypto exchange, earlier this month has diminished their reputation. Founder Sam Bankman-Fried, who once symbolized the security and investment potential of these markets, is now overshadowed.
Amid accusations of financial misconduct and signs of disorganized and reckless internal practices, FTX sought bankruptcy protection on November 11. This marked the second instance within four months where a prominent player in the industry, Celsius Networks, also perceived as a successful and reliable entity, filed for bankruptcy.
On July 13, Celsius declared bankruptcy, resulting in an unexpected downfall that has left numerous of its 1.7 million customers suffering severe financial losses.
It remains uncertain if these failures will dampen the endeavors of investment promoters in luring ordinary working individuals into the unpredictable world of cryptocurrencies.
Fidelity Investments, one of the leading firms, has taken a leading role by offering retirement plans for approximately 35 million participants who collectively hold assets worth around $1.4 trillion. Fidelity made an announcement earlier this year regarding its decision to permit plan sponsors to provide their employees with the opportunity to invest in bitcoin.
Do Democratic Sens. Elizabeth Warren of Massachusetts, Dick Durbin of Illinois, and Tina Smith of Minnesota believe it is a wise policy? In a letter dated November 21, they requested Fidelity to reassess its stance.
They wrote that the collapse of FTX clearly highlights the major issues within the digital asset industry. They further mentioned that the industry is populated with charming prodigies, deceptive swindlers, and self-proclaimed financial advisors who promote financial products lacking transparency.
The lawmakers’ subsequent letter echoed their previous one from July 26, in which they expressed deep concern over Fidelity’s decision.
Although the choice of whether to permit employees to invest in bitcoin through their 401(k) plans lies with their employers, they suggested that it would be unwise for a prominent figure in the finance industry to support the inclusion of such a unpredictable, hard-to-sell, and speculative asset in retirement savings vehicles like 401(k) plans, which are specifically designed for consistent long-term returns.
Both systems have their advantages and disadvantages. Long-term employees are most suited for defined benefit plans, as these plans are most beneficial to those who remain with a single employer throughout their career. The employer assumes the risk of investment market declines in such plans, but this risk generally does not apply to new employers.
Workers assume the risks of market downturns, although defined contribution plans offer portability as they can accompany employees during job changes.
Americans may possibly lose interest in the investment category due to the news coverage of FTX’s collapse and revelations about its internal chaos.
There is a growing sense of doubt as one online sports betting company, Bet Online, is now allowing bets on which crypto exchange will be the next to declare bankruptcy. (During the period leading up to Thanksgiving, the most favored exchange to file for bankruptcy was Crypto.com, the exchange which has paid for branding on the former Staples Center, the Los Angeles location where NBA Lakers and Clippers hold their matches.)
It is possible that the allure of fast wealth will be stronger than the risks associated with entrusting one’s valuable retirement savings to investment firms that operate without regulations or by their own set of rules. Regardless of the mounting evidence suggesting the dubious nature of certain products, ordinary Americans cannot be prevented from investing in them. However, it should be pointed out that they have been duly cautioned.
Are Crypto and Retirement Savings a Risky Mix?
Although there has been a significant decline in cryptocurrencies this year, there is still a considerable level of interest from investors. In fact, this interest is so high that certain 401(k) plans may soon provide the option to invest in Bitcoin. However, it is essential to note that just because you have the opportunity to invest your retirement savings in Bitcoin, it does not necessarily mean it is a prudent decision.
“Cryptocurrencies are still relatively new, largely unregulated, and very volatile, which isn’t a great mix for a traditional long-term portfolio,” says Rob Williams, managing director of financial planning, retirement income, and wealth management at the Schwab Center for Financial Research. “Think of your retirement savings as the foundation of your financial house. You want to build your foundation out of strong, trusted materials.”
This implies that it is wise to invest in established asset classes such as stocks and bonds, which have a proven history of potential growth over the long term and are evaluated based on assets, earnings, and other tangible indicators.
“These securities are tied to the intrinsic value of their underlying companies, whereas cryptocurrencies do not yet have such inherent value,” Rob explains. “And, unlike fiat currencies, cryptocurrencies aren’t backed by the full faith and credit of a government—they’re worth only what others in the market are willing to pay for them.”
The issue of taxes should also be taken into account. If the cryptocurrency held in a conventional 401(k) or IRA increases in value, the profits will be subject to regular income taxes when withdrawn, while cryptocurrency held in a taxable account for more than a year would be subject to more advantageous long-term capital gains rates of 0%, 15%, or 20% depending on income. (No taxes would be applicable to any crypto investment gains made within a Roth 401(k) or Roth IRA.)
Furthermore, in the case of depreciation of the cryptocurrency you possess in a retirement account, it is not possible to utilize those losses to counterbalance realized profits or income as it is feasible in a taxable account. Rob explains that owing to the unpredictable characteristics of cryptocurrencies, it is expected that losses will occur, and it is desirable to benefit from them. This serves as another justification as to why speculative trades like these are generally less suitable for retirement accounts.
Although there have been profitable cryptocurrency investments, especially for those who invested early on, the majority have resulted in financial losses. Rob advises, “If you are considering entering the cryptocurrency market, make sure to proceed with caution and avoid risking your savings.”
Investors should consider Bitcoin as a purely speculative instrument due to its high level of risk, as it lacks the regulations and consumer protections that legal tender currencies and regulated securities have, and is highly volatile, not being backed by any central bank or government.
Not all investors are suited for currencies as they are speculative and highly volatile.
When investing, there is a risk of losing the initial amount invested. During periods of rising interest rates, fixed income securities may experience a higher loss of the initial amount invested. Additionally, fixed income investments are exposed to different risks such as changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax consequences, and other factors. Securities with lower ratings carry a higher level of credit risk, default risk, and liquidity risk.
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