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Crypto in Your 401(k)?

Dana McClure

Principal, Business Consulting
Blog
  • Financial Services

Unless you’ve been willfully avoiding most forms of media, you’ve likely been inundated with stories and ads on digital currency or cryptocurrency (crypto) investing. Blockchain technology and digital asset networks launched over a decade ago have now become a mainstream trending topic, sending many financial institutions into brainstorm mode. 

A few firms have even allocated resources to create service offerings that include some form of digital asset consideration. Investors who have yet to open an account for direct crypto trading at this point are at least likely to be curious about dipping their toes into the crypto investment pool, but may be understandably nervous about the risks involved.  

That said, many financial services or wealth management firms have taken notice and are beginning to review the overall pros and cons of layering crypto assets into product toolsets. Many of these same firms are also discussing how these products fit into the overall investment and financial planning hierarchy for any given client or household. Given the complexity of the issue, there is a lot to take into consideration when trying to gauge the role crypto can play in a client’s investment portfolio for both retirement and non-retirement accounts alike.      

In March, the Department of Labor (DOL) released a statement in response to the high volume of inquiry from firms that are considering the addition of crypto investment services and tools, specifically as part of their retirement plan offerings. In their statement, the DOL advocated for fiduciaries to take extreme care in making these plan lineup decisions, citing “serious concerns” about exposing investors to crypto investment risks. 

At the time, the DOL highlighted various risks, such as high trading volatility, valuation inaccuracies, storage safety, the potential for fraud and a lack of defined regulatory guidelines in the crypto space. Plan sponsors – those who are responsible for investment lineup oversight in retirement plans – have been warned by the DOL that they may be included in upcoming investigations and subsequent corrective actions should they choose to include crypto or digital asset options without adequately protecting the interests of plan participants. The DOL's action came on the heels of President Joe Biden’s executive order acknowledging digital assets have become prevalent enough to warrant possible federal regulation. 

Interestingly, while most retirement plans such as 401(k)s do not yet currently offer either direct (spot market) crypto trading or futures trading, many do provide options to enroll in a brokerage window as a supplement to the core investment lineup. Brokerage services are not typically part of a retirement plan’s portfolio models or advice platform. Rather, they are considered self-directed and outside of the core plan lineup, but certainly offer more choice and flexibility, including indirect access to crypto exposure through stocks, mutual funds, exchange traded funds (ETFs) and trusts. 

A new corner of the investing universe

Either in a retirement or non-retirement brokerage account, some of the most widely available indirect investing options for gaining crypto and/or blockchain technology exposure allow investors to limit the added risks of owning a single currency position. Therefore, the probability of suffering a drastic loss can be reduced. There are three main crypto investment vehicle types1 which include:

Stocks

Stocks with indirect exposure to cryptocurrency or a focus on blockchain technology, based on the company’s relationship to digital asset transactions, digital asset mining and hardware. A few examples include: 

  • Coinbase (COIN)
  • Marathon Digital Holdings (MARA)
  • Riot Blockchain (RIOT)


Mutual Funds and ETFs

Mutual funds or ETFs that invest in Bitcoin futures contracts. Bitcoin futures are a derivative instrument that provides indirect access to the price of bitcoin, while removing the complexities of the Bitcoin blockchain itself. Examples include: 

  • Bitcoin Strategy Profund (BTCFX)
  • Proshares Bitcoin Strategy (BITO)
  • Valkyrie Bitcoin Strategy (BTF)
  • Global X BlockChain & Bitcoin Strategy (BITS)


Coin Trusts

Products that allow investors to trade shares in trusts holding large pools of a cryptocurrency- asset. A few examples include:

  • Grayscale Bitcoin Trust (GBTC)
  • Osprey Bitcoin Trust (OBTC)
  • Grayscale Ethereum Trust (ETHE)

Similar to other hot trending screening features like environmental, social, and governance (ESG) categories, crypto thematic based screeners and educational tools can act as value-add services and help differentiate a firm’s service offering.

1 Information provided here are for general informational purposes as examples only and should not be considered an individualized recommendation. Investments mentioned here may not be suitable for everyone. Investors should review an investment strategy for their particular situation before making any investment decision, considering risk and appetite for loss.

Missing innovation opportunity

The rub here is that due to the speculative nature of even indirect crypto investment exposure – and taking into account the recent DOL statement and the President’s executive order – some brokerage and wealth firms may be hesitant in the near term to invest in tools and services that help investors simply screen and identify crypto-focused funds.

There’s also the challenge of understanding how these tools and services align within their broader advice, financial wellness or financial planning platforms. Ignoring these considerations is probably not the best tactic for brokerage and wealth firms. Rather, emerging technologies can be focused on helping investors create preferences and set thematic investment guardrails as part of a comprehensive portfolio strategy. Just like other thematic investing preferences, firms can use investment data and artificial intelligence techniques to help sort and group digital asset investments. 

At the end of the day, many investment and wealth management firms will likely wait on the sidelines for more crypto-specific government regulation and oversight controls. However, industry leaders who value the use cases driving market momentum will most likely start to launch more broad-based, thematic driven portfolio models and portfolio construction offerings, possibly with 1%-5% allocations available toward crypto or other highly desired thematic investments. 

For investors eager to test using crypto as an integrated part of a diversified growth-oriented portfolio, the inclusion of digital assets through indirect investment may make perfect sense – especially for a tax advantaged retirement account.

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