You can now add Bitcoin to your 401(k) plan — but should you? Fidelity Investments, the country’s largest retirement-plan provider, made waves this spring when it announced it would add Bitcoin as an investment option for 401(k) plans. Up to 20% of 401(k) funds can be allocated to Bitcoin under the new policy, through Fidelity’s digital asset platform, which is expected in mid-2022.

The temptation to experiment with a risky investment might be stronger now for Americans than in the past; a new Gallup poll shows just 46% of Americans rate their personal finances positively, down from 57% just a year ago. Is this high-risk alternative asset right for you? Here’s what to consider.

Bitcoin has uncertain value

Bitcoin is the world’s first decentralized cryptocurrency. Unlike national currencies, linked to a country’s financial system, Bitcoin has no assets behind it to support its value.

The price of Bitcoin has fluctuated greatly in recent years. Bitcoin reached an all-time high on Nov. 10, 2021, when it was valued at $64,995. But by May 2022, it had declined to $28,305. In June 2022, it had only gradually increased to $29,127. These massive swings make Bitcoin a risky investment.

That volatility is coupled with a lack of regulatory oversight, which is enough to give many of those nearing retirement pause.

What to ask yourself: If you would have invested in Bitcoin in November 2021 and let your funds remain untouched until May, you would have lost about half of your money. Perhaps the price of Bitcoin will again pick up — but if you’re about to retire, you might not have time to wait. Do you have the risk tolerance to potentially see your retirement savings decline?

Regulators aren’t sold on cryptocurrency

The U.S. Department of Labor regulates company-sponsored 401(k) plans — and the department is not completely bullish on cryptocurrency. In a March 2022 correspondence, it cautioned fiduciaries to exercise “extreme care” before adding a cryptocurrency option for plan participants.

In its memo, the department listed the following five concerns that make cryptocurrency a risky bet:

• Speculative and volatile investments: The Securities and Exchange Commission considers cryptocurrency highly speculative, especially considering the extreme price volatility.
• The challenge of making informed decisions: Cryptocurrencies are typically billed as the “next big thing” in finance, and it can be hard — even for seasoned investors — to separate the hype from the reality. These aren’t typical retirement plan investments, which are considered prudent choices by many. It can be difficult for many people to make a truly educated decision.
• Recordkeeping concerns: Some methods of holding cryptocurrencies can be vulnerable to hackers — remember, cryptocurrency is held in a digital wallet. Unlike other retirement assets that can be held in trust, cryptocurrency is difficult to manage, which could make it an unwise investment for some retirees.
• Valuation concerns: Cryptocurrency valuations aren’t guaranteed to be accurate. The cryptocurrency market fundamentals are still evolving, and the academics behind valuation haven’t caught up to the lived reality. This makes it difficult to accurately value the currency.
• Evolving regulatory environment: The rules around cryptocurrency are still changing, and the best way to enforce them is still in question.

What to ask yourself: There are still many questions surrounding the value of cryptocurrency and the best way to regulate it. To what degree is certainty important to you when choosing how to invest your funds for retirement?

Bitcoin can be hard to understand

Cryptocurrencies are conceptual and can be difficult for a lot of people to understand — even academics. When you buy a house, it’s easy to understand the ways you could make money on that investment. You could make home improvements, or your neighborhood might become more desirable, and eventually, you could possibly sell your house at a profit. But how can you tell what influences the value of Bitcoin? The answer is a bit murkier.

Even just understanding the process of how Bitcoin is stored can come with a learning curve for many people. But you can learn. There are many online resources that can walk you through Bitcoin basics. Your financial advisor should also be able to help you grasp the fundamentals of this alternative currency.

If you’re going to get started with Bitcoin, you should, at a minimum, understand how to buy, use and invest with Bitcoin. You’ll want to know how it’s stored, who uses it, how it’s mined and what influences its value. This can help you determine if you want to allocate a portion of your 401(k) toward Bitcoin and to what extent you will invest.

What to ask yourself: How much time are you willing to commit to learning about Bitcoin? Can you increase your knowledge to a point where you feel comfortable making this investment?

Bottom line

The possibility of adding Bitcoin to your 401(k) has generated a lot of excitement among Americans who are curious about what digital currencies are all about. While it could prove to be a great option for retirement, remember that it’s still in the early stages and significantly speculative. Commit yourself to learning the fundamentals of cryptocurrency before jumping in with both feet.
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Jolene Latimer has her Master's in Specialized Journalism from the University of Southern California. She writes about personal finance, marketing and sports.