The risks and benefits of cryptocurrency

Matt: Earlier, we talked about the new rule changes that could bring cryptocurrency to your 401(k). Now, in part two, we're taking a closer look at the potential risks and whether it actually makes sense for long-term investors.

Back with us is CFP® and Managing Partner at Lakewater Advisory, Dan Bennett, to dig into the decision side of this.

Dan, welcome back. I want to start with this: From a financial planning standpoint, what's the biggest risk in putting cryptocurrency into a retirement account?

Dan: Certainly the volatility and the risk of loss.

It's not uncommon for Bitcoin and other cryptocurrencies, but specifically Bitcoin since it's the most popular, to lose 30%, 50%, 60%, or even 70% of its value in a very short amount of time.

Matt: Like a week.

Dan: Yes. We've seen it happen multiple times.

We talked about the returns in our last segment, but those returns didn't come without a roller coaster ride along the way and a few different temper tantrums.

As a dad of a couple of kids under seven, I can confidently identify what those are.

Matt: So what kind of savers, if any, could potentially handle having a small slice of crypto in their retirement plan? And how small of a slice are we talking about?

Dan: If you're one or two years away from retirement and you think Bitcoin is going to help you close the gap a little faster, you should probably think again. It may not be the best investment option for you.

However, if you're 10, 15, 20, or even 30 years away from retirement, it may make sense depending on your risk profile and your tolerance for risk.

If a small portion of your portfolio is allocated to cryptocurrency, we generally recommend no more than about 2% to 4%.

Treat it like an individual stock.

Matt: You were telling me that Bitcoin is obviously the most well-known cryptocurrency. Ethereum is also well known. But beyond that, it seems like the market has become flooded with altcoins and everything else. Is that mostly noise?

Dan: I think a lot of it is.

In my opinion, it should start and end with Bitcoin if cryptocurrency fits into your overall plan.

You're also limited when it comes to 401(k) plans. You can only invest in the types of cryptocurrencies available through a self-directed brokerage window.

Bitcoin can be purchased directly, or investors can use exchange-traded funds (ETFs) that invest in Bitcoin or other cryptocurrencies.

There are also individual stocks that hold Bitcoin and other cryptocurrencies on their balance sheets, which some investors may choose to own instead.

Matt: I don't want to go over anybody's head here. How is cryptocurrency different from stocks or mutual funds in the context of retirement planning?

Dan: It's very different.

When you invest in an individual stock, you're buying ownership in a company. That company has cash flow, a balance sheet, and valuation metrics.

It may also pay dividends or generate income.

Cryptocurrency is different because it's not a company. It's a decentralized digital asset.

Matt: And you're only buying a piece of that coin.

Dan: Right. The primary way investors profit is if the value increases and they later sell it for more than they paid.

Matt: If someone is curious but also cautious, what should they be asking their employer or retirement plan provider as these options become available?

Dan: The first step is asking your employer or HR manager whether your 401(k) plan allows for a self-directed brokerage window.

As we mentioned before, cryptocurrencies are typically not available directly within the standard investment lineup of a 401(k) plan, but they may be accessible through that brokerage window.

That's the first question to ask.

Then work with a financial professional, along with your HR team, to determine whether cryptocurrency is appropriate for your situation.

Matt: I know you've been getting a lot of questions about this topic. Great insight as always, Dan. Where can people find you online?

Dan: Through our website at LakewaterAdvisory.com. We're also on X, Instagram, YouTube, and other social media platforms.

Matt: So if cryptocurrency is available in your 401(k), it definitely isn't a one-size-fits-all decision.

Dan: That's right.

Matt: Dan Bennett with Lakewater Advisory. Thank you so much. We'll be right back after a quick break.