Outside the Box: I’m a financial adviser, and I’d discourage you from putting bitcoin in your 401(k)

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As a financial adviser, I was surprised to see that Fidelity Investments is going to give employers the option to add bitcoin to their 401(k) menus this year. This is a big deal, given that Fidelity is a leading custodian in the retirement space and a dominant player in the investment marketplace.

While Fidelity’s move makes some of the details of bitcoin
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investments easier, I remain hesitant to recommend cryptocurrencies to my clients. Except, perhaps, for those with a high appetite for risk, who are big fans of cryptocurrencies and who can otherwise afford to lose the money.

Other than the fact that early adopters have made money, I don’t currently see a case for buying bitcoin as an investment. That is a terrible reason to invest in something.

There are no productive individuals, businesses or governments behind it, no reason for it to give a return, other than that it is scarce, because it is limited to 21 million coins. Scarcity is a reason many give for buying gold or silver – there is only so much of it.

That is often the case for other commodities. For example, let’s buy wheat because we think there will be higher demand leading to higher prices. Gold, silver and commodity prices, though, are very volatile, and there is no long-term history of strong positive real returns for them, unlike stocks, bonds, and real estate. That is why we don’t buy gold, silver or other commodities for our clients. We think they are more short-term speculation than investment. (I know commodities can be used as hedges for different industries, I am discussing whether someone without those interests should buy commodities to speculate, and I don’t think they should.)

Despite the fact that bitcoin promoters rally around the fact that it’s nonsovereign currency, it’s still not beyond the scope or reach of governments. The U.S. government has caught at least a couple of scammers in cases involving crypto.

I am skeptical that most people will use crypto as regular currency because of the speculative nature. Who is going to spend crypto on a Tuesday to buy lunch if it might be worth 5% more later that afternoon? Even if it widely adopted and used like currency, I wouldn’t recommend it because we don’t invest in currencies, again because there is no history of positive real returns. We don’t buy dollars; we buy investments denominated in dollars.

Some see crypto as an inflation hedge, but it’s lost a lot more value than the dollar has this last inflationary year and it’s not old enough to have a track record of being an inflation hedge during previous inflationary times.

Some of the other issues around it are that you need to purchase it outside your traditional investment channels, think Coinbase Global, not Charles Schwab, and it’s not secure – even the Wolf of Wall Street had his digital wallet hacked.

You can also run into a major problem by just forgetting your password. Who hasn’t forgotten a password? We’ve all heard the story of the programmer who lost roughly $220 million because he couldn’t access his account. He says he’s at peace with it now.

The Super Bowl … and Ukraine

So I was already skeptical about crypto, and then the Super Bowl ads cinched it for me. They seemed so reminiscent of the tech ads like pets.com that aired during the Super Bowl right before the tech bubble popped. Tom Brady imploring you to get in the game left me wanting no parts in it.

Then Ukraine happened. As previously mentioned, bitcoin can be used as nonsovereign currency, and there seems to be a case for that. You can move bitcoin to other people all over the world without the costs or delays involved in moving regular money, like dollars, and without the various governments getting in your way.

It has been used to aid the Ukrainian government and people, and they’ve needed all the help they can get. Maybe that leads to more change and innovation and productivity than we can see now? Maybe other uses will come up or the current uses will lead to more change for the better? Maybe completely unforeseen uses will become commonplace? I don’t know; I can’t predict the future. Bitcoin appears to be a big game changer – and I don’t think anyone knows exactly where it will lead.

Fidelity stepping into this market and allowing employers to offer it in their 401(k)s will change this market. It will solve some of the known problems with investing in bitcoin. If Fidelity is acting as the custodian of your 401(k), then you don’t need to worry about having to purchase it through a new channel or keep it secure – that is Fidelity’s job now.

And if you forget your Fidelity password, that is no big deal. Click on the “forgot password” link. It’s much easier to fix than forgetting your digital wallet password – where there is no one at a call center to help you.

If you want to invest in bitcoin, and can afford to take the risk, Fidelity has opened the door for you.

Michael J. Garry is a Certified Financial Planner who heads Yardley Wealth Management in Yardley, Pa. He is author of two books, “The Smart Person’s Guide to Financial Planning & Investments: A Simple and Straightforward Approach to Understanding Your Personal Finances “and “Independent Financial Planning: Your Ultimate Guide to Finding and Choosing the Right Financial Planner.”