Fidelity 401(K) And Bitcoin: Investing In Crypto

In 2022, Fidelity became the first major financial services firm to offer investors the chance to add crypto assets to their 401(k) retirement accounts. Employees with a Fidelity 401(k) account can allocate a percentage of their account to Bitcoin, but only if their employer allows them to make such a designation. The company will charge an account fee of between 0.75% and 0.9% of the funds invested in the digital asset account, as well as a trading fee. However, financial advisers warn that investing in cryptocurrencies through a 401(k) plan is a risky bet due to the volatility of the crypto market.

Fidelity's Bitcoin 401(k) product

In April 2022, Fidelity became the first financial services firm to offer investors the chance to add crypto assets to their 401(k) retirement accounts. The company announced that by late 2022, employees will be able to allocate a percentage of their 401(k) accounts to Bitcoin—but only if their employer allows it.

The process of buying Bitcoin through the Fidelity 401(k) product is similar to purchasing shares in mutual funds. However, it's important to note that cryptocurrencies are highly volatile and may not be suitable for long-term investment strategies. As such, investors should carefully consider the risks before adding Bitcoin to their retirement portfolios.

Crypto volatility

As a relatively new asset class, crypto is highly volatile and therefore riskier than traditional asset classes. Crypto market volatility is in a league of its own. A look at historical price action charts confirms this; extreme rises and aggressive drops have occurred at a rapid pace in crypto compared to prices of assets in mainstream markets. Using Bitcoin (BTC) as an example, it has witnessed over eight 50% corrections in its 15 years of existence. However, Bitcoin has managed to recover from each correction over a full cycle to make new all-time highs, including a high of US$73,000 in March 2024.

Factors affecting crypto volatility include speculation and news events, such as COVID-19, which drive price swings in crypto and mainstream markets. However, the effects of these events are often amplified in crypto due to its unique characteristics. The crypto market is heavily influenced by investor sentiment, and the immaturity of the market means that positive or negative views can spread like a contagion. For instance, when Tesla bought Bitcoin in January 2021, the markets reacted with exuberance, igniting a price rally to an all-time high of around US$69,000 in the following months.

The distribution between supply and demand also plays a major role in the volatility and price movements of any asset, but it is particularly nuanced in the crypto space due to the unique supply dynamics of many digital assets. The limited supply of certain assets, such as Bitcoin, can create conditions where sudden increased demand can put even greater upward pressure on prices, increasing volatility.

While crypto volatility may be a concern for investors, it is important to note that Fidelity has stated that it will offer Bitcoin as an option for 401(k) accounts it serves. However, employers will have the final say as to whether their employees will be able to access Bitcoin for these accounts.

Regulatory uncertainty

Investing in Bitcoin through a Fidelity 401(k) account is subject to regulatory uncertainty. Cryptocurrencies are a new asset class for investors worldwide, and the substantial inflow of unregulated capital into the industry has attracted the attention of national securities and monetary regulatory agencies.

In the US, the Securities and Exchange Commission (SEC) has been examining several aspects of cryptocurrencies, including the offer and sale of crypto tokens, crypto trading and lending platforms, and the custody of crypto assets. The SEC has also issued guidelines stating that Initial Coin Offerings (ICOs) are a security, regardless of how they are referred to by marketplace participants.

While some market-making firms, such as Jump Trading and DRW, have embraced cryptocurrencies, others, like Citadel Securities, have avoided trading in this asset class due to regulatory uncertainty. Citadel Securities founder Ken Griffin stated that he did not want to take on the regulatory risk in the current regulatory void.

The lack of regulatory clarity around cryptocurrencies has been cited as a barrier to wider adoption of digital assets such as Bitcoin. However, there is optimism that policymakers and regulators are seeking to better understand the technology and support innovation in the sector.

Risks of investing in Bitcoin

Investing in Bitcoin and other cryptocurrencies comes with a unique set of risks that investors should be aware of. Here are some of the key risks associated with investing in Bitcoin:

Volatility and Fluctuating Market

The price of Bitcoin is highly volatile and constantly fluctuating. This makes it challenging for investors to predict the market and secure gains. The value of Bitcoin can change drastically in a short period, leading to potential losses for investors. Small investments made over time are generally recommended to mitigate this risk.

Cyber-Security Threats and Fraud

Bitcoin and other cryptocurrencies are susceptible to cyber-attacks, hacking, and fraud due to their technology-dependent nature. There have been several incidents of exchanges being hacked and users losing their investments. Additionally, fraudulent exchanges and fake online transactions can dupe unsuspecting investors out of their Bitcoins. Investors must carefully research and choose secure wallets and exchanges to minimise this risk.

Limited Regulation and Uncertain Tax Treatment

The Bitcoin market currently operates with little to no major regulations, as governments and regulatory bodies are still figuring out their stance on cryptocurrencies. This lack of regulation creates uncertainty and increases the risk of fraud and security issues. Additionally, the tax treatment of cryptocurrencies varies across jurisdictions, with some considering them assets and others treating them as currency. This uncertainty can make it challenging for investors to understand their tax obligations and potential liabilities.

Technology Reliance and Digital Security

Bitcoin is entirely reliant on technology, and any issues with the underlying technology can impact its value. Digital security threats, such as hacking and phishing attacks, pose a significant risk to Bitcoin investors. If an investor loses their private key or it is compromised, they may lose access to their Bitcoins with no way to recover them.

Loss of Confidence and Market Adoption

Bitcoin and other cryptocurrencies are part of a new and rapidly evolving digital assets industry. The value of these currencies is determined solely by market participants' perceived value. A loss of confidence in digital currencies or negative regulatory changes could lead to a collapse in trading activities and a sharp drop in value. Additionally, the market adoption of cryptocurrencies remains low due to regulatory concerns, technology shortfalls, public misunderstandings, and the emerging nature of the technology.

How to buy Bitcoin

Bitcoin is a cryptocurrency, a digital form of currency that can be transferred peer-to-peer through the internet. Cryptocurrencies are highly volatile and susceptible to market manipulation, so it is important to understand the risks involved before investing.

There are several ways to buy Bitcoin:

Buying Bitcoin Outright:

This is the most straightforward way to invest in Bitcoin. You can buy it directly through a traditional investment platform or a crypto exchange, such as Fidelity Crypto®, starting with as little as $1. Buying Bitcoin outright gives you complete custody over your coins and allows you to transfer them between wallets (personal crypto accounts).

Buying Crypto Exchange-Traded Products (ETPs):

Crypto ETPs give you direct exposure to a cryptocurrency's value without needing to buy the coin yourself. ETPs can be purchased through brokerage accounts, IRAs, and trusts, which may simplify tax and estate planning considerations compared to buying crypto directly. However, ETPs have unique trading limitations and do not offer direct ownership of the cryptocurrency.

Buying Crypto-Related Exchange-Traded Funds (ETFs):

Crypto-related ETFs offer exposure to a diversified basket of cryptocurrency stocks or the futures of specific cryptocurrencies. These may offer less volatility compared to buying individual cryptocurrencies and can be more convenient for investors who want to invest in the industry as a whole. ETFs, however, do not provide ownership of actual cryptocurrencies, and the upside associated with individual cryptocurrencies can be diluted.

Buying Cryptocurrency Stocks:

Another way to gain exposure to the crypto industry is by buying individual stocks of companies in the crypto space, such as crypto exchanges, bitcoin mining companies, or banks providing solutions for crypto companies. Most major brokerages allow you to trade these stocks without fees, although this strategy carries the risks associated with crypto's inherent volatility and other factors.

It is important to note that the future regulatory environment for crypto is uncertain, and direct investments in crypto are not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation. Therefore, it is crucial to only invest an amount you are willing to lose.

Additionally, when considering investing in Bitcoin through a 401(k) retirement account with Fidelity, it is important to remember that this depends on whether your employer allows it. Fidelity has introduced a Digital Assets Account option, allowing employees to allocate a percentage of their 401(k) savings to Bitcoin, but the final decision rests with the employer.

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