Crypto in Your Retirement Account? It's Not a Crazy Question

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Are you considering investing in crypto in your retirement account? These days, you're not alone. The surge in interest in cryptocurrency and the changing regulatory landscape will likely have a major impact on retirement planning.

Donald Trump's presidential win marked a turning point in cryptocurrency regulation. His choice of Paul Atkins, a well-known regulatory skeptic and co-chair of the crypto lobbying group Token Alliance to lead the SEC (Securities and Exchange Commission) signals a pivot toward a more crypto-friendly framework.

Adding fuel to the fire, Trump has floated bold policy ideas. This has included the creation of a “Strategic Bitcoin Reserve” and a proposal to exempt capital gains taxes on cryptocurrency, according to The Street.

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Meanwhile, Wall Street has ramped up its embrace of crypto with Bitcoin and crypto ETFs and other products. Industry giants like Fidelity, Schwab, and BlackRock are leading the charge. A major catalyst for this enthusiasm has been the rise of spot Bitcoin ETFs (exchange-traded funds), which have made it much easier to invest in crypto.

In light of these trends, cryptocurrency may become a staple in retirement accounts. While the potential for growth is attractive, investors must weigh the risks with their financial goals.

How to invest in crypto in your retirement account

There are two ways to get exposure to crypto in a retirement account.

First, there is the indirect approach. This is when you invest in a publicly traded security like a spot Bitcoin ETF. This is available with traditional IRAs, Roth IRAs and even some 401(k)s.

Next, there is the direct approach, in which you purchase cryptocurrencies within your retirement account. This involves working with a platform designed for such investments, like Alto’s CryptoIRA, which supports over 200 cryptocurrencies, including Bitcoin, Cardano and Polygon. Some providers also offer cold storage options, where your digital assets are stored offline in hardware wallets. This can provide an extra layer of security against online threats.

Direct investing requires setting up a self-directed IRA. However, not all IRA providers offer this level of flexibility for crypto investments. In addition to Alto CryptoIRA, platforms like iTrustCapital, BitcoinIRA, and Coin IRA are players in this space.

Keep in mind that you cannot fund an IRA with cryptocurrency directly. Contributions must be made in cash or rolled over from an existing retirement account.

You also need to be careful about the costs. “There are three basic costs of a crypto IRA,” said Mark Parthemer, the chief wealth strategist and Florida regional director at Glenmede. “There are setup and recurring account maintenance fees, transaction fees or commissions, and investment expenses, such as a mutual fund’s internal costs. Some crypto IRA firms have been criticized for significant fees. My advice in this area — know before you buy. Read the fine print, and compare the total fees and costs.”

The benefits of crypto

To understand the potential benefits of cryptocurrency, it’s important to know how it is structured. Cryptocurrencies are stored on a blockchain, which is a sophisticated database that records transactions in a decentralized manner. This decentralization eliminates the need for third-party verification, such as governments or financial institutions. Each block of transactions in the blockchain is linked to the previous one through a cryptographic hash. Transactions are validated using consensus mechanisms like proof-of-work or proof-of-stake, which maintain the integrity of the network and make it difficult to hack or manipulate.

Transparency. A key advantage of blockchain technology is its transparency. All transactions are visible to participants. This transparency has helped build confidence in cryptocurrencies and their applications. For instance, Bitcoin, the most well-known cryptocurrency, has reached a market value of nearly $2 trillion.

Cost. Cryptocurrencies also offer efficiency and cost advantages for monetary transactions. Being inherently digital, they bypass traditional financial systems, allowing for faster and cheaper transfers. This is especially the case for international payments.

Scarcity. Beyond transactional uses, cryptocurrencies like Bitcoin have become a popular investment asset. In 2024, Bitcoin nearly doubled in value. Bitcoin’s capped supply of 21 million coins creates scarcity, adding to its value proposition.

Diversification is another advantage. “Crypto is different from any other asset class and can reduce portfolio volatility and enhance long-term returns by spreading risk across different asset classes,” said Eric Satz, the CEO and founder at Alto.

The downsides of crypto

Any new type of asset class should come with a "buyer beware" warning, but that is especially true in this case.

Volatility. Crypto is still an emerging asset class, its origins dating from 2008 when Bitcoin was launched. Over this period, it has been a rollercoaster of volatility. In the case of Bitcoin, it has suffered eight 50% corrections, according to Caleb & Brown. Bitcoin and other cryptocurrencies rely heavily on speculation and leveraging.

The crypto market can be sensitive to swings in investor sentiment. This can be exaggerated with the relatively low amount of liquidity in the global market, at about $3.59 trillion versus $50.65 trillion for the S&P 500.

Regulatory risk. While it's true that Trump has signaled strong regulatory support for crypto, it's not in place yet and it is unclear what form it will take. There are very few 401(k) accounts currently investing in crypto, according to a report by the Government Accountability Office (GAO). However, the report notes that "federal regulatory gaps GAO identified in June 2023 remain unaddressed. As a result, certain crypto assets continue to trade in markets that do not have investor protections or comprehensive oversight."

Fraud. Crypto has also been susceptible to fraud and scams. In 2023, the FBI's Internet Crime Complaint Center received over 69,000 complaints related to cryptocurrency fraud. The losses exceeded $5.6 billion, up 45% from the previous year.

Disruption. Another issue is the potential disruption of new technologies. After all, innovations — say those powered by AI or even quantum computing — may make blockchain systems obsolete. This could devastate the valuations of existing cryptocurrencies.

Environmental risk. Cryptocurrencies that rely on proof-of-work mining require massive amounts of computing power, all of which must be fed electricity and cooled. While many investors may be aware of the large energy consumption involved, few know of the water impact. Each Bitcoin transaction requires about as much water as one backyard swimming pool.

Bottom line

Given the risks, it’s important to be prudent with crypto. Research from BlackRock considers up to 2% of a portfolio invested in Bitcoin as “reasonable.”

“If it went to zero and you were in BlackRock’s range for allocation, you likely would not permanently harm your portfolio outcome,” said Brian Spinelli, a CFP and co-chief investment officer at Halbert Hargrove. “The stocks alone may have days where they move the portfolio around by more than 1%. If your stock allocation is all S&P 500, you have more dependency on Nvidia’s outcome right now than you would with a small allocation to Bitcoin.”

Still, your retirement portfolio may need to last a long time, and 2% might even be too much to speculate on crypto. Before those shiny coins tempt you, seek out a financial adviser for guidance.

Tom Taulli has been developing software since the 1980s when he was in high school. He sold his applications to a variety of publications. In college, he started his first company, which focused on the development of e-learning systems. He would go on to create other companies as well, including Hypermart.net that was sold to InfoSpace in 1996. Along the way, Tom has written columns for online publications such as Bloomberg, Forbes, Barron's and Kiplinger. He has also written a variety of books, including Artificial Intelligence Basics: A Non-Technical Introduction. He can be reached on Twitter at @ttaulli.