Should you invest your 401 (k) in cryptocurrency?
Cryptocurrency has taken the world by storm over the past few months and may soon be hitting your 401 (k).
ForUsAll, a 401 (k) plan provider, has partnered with the cryptocurrency exchange Global Coinbase (NASDAQ: COIN) to allow investors to allocate up to 5% of their 401 (k) contributions to cryptocurrency, as recently reported by The Wall Street Journal.
Four hundred employers offer 401 (k) plans through ForUsAll, and if yours is one of them, you might have the option to start investing in cryptocurrencies just by contributing to your 401 (k).
This partnership will greatly facilitate investment in cryptocurrencies. Typically, this involves purchasing the currency of your choice through a crypto exchange – not a regular exchange. You will also need to keep your cryptocurrency tokens stored in a digital wallet rather than a typical brokerage account, as you would when investing in stocks.
If you are able to invest in cryptocurrency through your 401 (k), however, it is much more accessible. But is it a smart investment? Here’s what you need to know.
Is cryptocurrency safe?
Cryptocurrency may be the hottest new trend in the investment world, but that doesn’t mean it’s safe. He’s proven to be incredibly volatile and prone to heavy drops in no time.
Concrete example: since its peak in mid-April, the price of Bitcoin (CRYPTO: BTC) fell almost 40%. It’s not the worst Bitcoin has seen, however; it has fallen by over 80% several times over the years.
And Bitcoin isn’t the only cryptocurrency prone to volatility. Ether (CRYPTO: ETH), the second most popular cryptocurrency behind Bitcoin, lost almost 94% of its value in 2018. And Dogecoin (CRYPTO: DOGE) saw its price drop by over 40% in just two weeks last month.
All investments can be volatile at times, but cryptocurrency is much more turbulent than the average stock. If you are preparing for retirement, this kind of volatility can be overwhelming.
Additionally, cryptocurrency is still very speculative. Unlike stocks, which have provided consistent long-term growth, no one knows what the future holds for crypto. It could end up transforming the world’s monetary systems, or it could collapse and burn. And if it fails, you could lose all the money you put in.
Is this the right investment for you?
This is not to say that cryptocurrency is a bad investment. But whether or not you choose to invest depends on your timing and tolerance for risk.
If you have money to spare and plenty of time to retire, investing in crypto isn’t necessarily a bad decision. Just make sure the rest of your savings are behind solid investments so you don’t lose everything if the cryptocurrency doesn’t work.
Additionally, if you choose to invest in cryptocurrency, only invest money that you would be comfortable losing. Because this is a high-risk investment, you don’t want to gamble your retirement on it and potentially jeopardize your financial future.
On the flip side, if you’re near retirement and can’t afford to try your luck with your savings, it’s probably best to avoid cryptocurrency for now. Likewise, if you are a risk averse investor and know you would lose sleep if crypto prices fall (which they most likely will at some point) then this may not be right for you.
Whether or not you contribute some of your 401 (k) savings for cryptocurrency, be sure to take the decision seriously. Crypto isn’t for everyone, and for some people there are much better investments.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.