401(k) Plans Now Let Workers Put Retirement Money Into Cryptocurrency
Comment of the Day

November 08 2022

Commentary by Eoin Treacy

401(k) Plans Now Let Workers Put Retirement Money Into Cryptocurrency

This article from the Wall Street Journal may be of interest to subscribers. Here is a section:

Retirement-plan providers have moved ahead, and some of the 24,500 401(k) plans that Fidelity Investments administers began offering bitcoin in their investment menus this fall, the company said. ForUsAll Inc., a San Francisco-based 401(k) provider that caters to small companies and has $1.4 billion in retirement-plan assets, says 50 of its 550 clients began allowing workers to invest some of their retirement savings in cryptocurrency, including bitcoin and ether, about eight weeks ago.

The 401(k) companies are launching their crypto offerings amid a bear market that has caused steep selloffs in many cryptocurrencies. Since hitting a high of more than $66,000 in November 2021, bitcoin has fallen to $20,092.

The U.S. Labor Department, which regulates company-sponsored retirement plans, earlier this year cautioned employers to "exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan's investment menu," guidance that has had a chilling effect on some employers and providers.

Fidelity, the nation's largest 401(k) plan provider -- with $3.3 trillion in the plans it administers -- declined to provide details about companies offering its cryptocurrency option. It announced the offering earlier this year, citing demand from employers and workers.

Eoin Treacy's view

My first reaction is what could go wrong? Afterall, we are talking about what amounts to the most volatile asset class in history. Fidelity has led the market by offering custody services for cryptocurrencies. In opening up pension assets for investment in bitcoin, a significantly larger pool of potential buyers is now exposed to an exceptionally volatile asset class. It is to be hoped positions are sized accordingly, though that is seldom the case for individual investors.

Today was an exceptionally volatile day for bitcoin with a peak to trough swing of over $2000. The price first dropped because there was a run on FTX on fears the exchange was in trouble. Then Binance announced it would buy FTX so the price retraced the decline. Subsequently, the price declined again on the realization that acquisition confirms liquidity issues are serious at FTX.

At one point it might have been argued that bitcoin is an uncorrelated asset. That’s no longer true. It tends to do best when the limited supply argument has been burnished by a halvening and liquidity provision ramps up following a financial market crisis or mini-crisis.

The fact bitcoin has tended to lead the stock market over the last couple of years is a clear indication that it is now regarded as a risk asset. A bigger question is whether bitcoin is now also a bellwether for the health of the alternatives sector where endowments and pension funds are now receiving capital calls and with more to come. https://pitchbook.com/news/articles/university-endowments-returns-venture-capital

The bitcoin price was in an uncharacteristically tight range. Today’s downward dynamic, which breaks the very short-term sequence of higher reaction lows suggests the break is likely to be on the downside.   

For now Ethereum continues to pause at the upper side of a first step above the base relative to bitcoin. The Merge passed off smoothly and the resulting deposit (pledge) and dividend structure is a familiar set up for investors accustomed to dividend discount valuations.
In absolute terms the price has encountered resistance in the region of the 200-day MA and the psychological $1500. A sustained move above the trend mean will be required to confirm a return to demand dominance beyond short-term steadying.

This performance suggests Ethereum is, as yet, incapable of sustained outperformance relative to bitcoin in a falling market environment.

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