Bitcoin is Coming to Your 401(k)

With so many developments within the Bitcoin ecosystem it can often be difficult to keep up with all the news and moves within this sector. Amongst all the market volatility across both the traditional and crypto markets paired with recent macroeconomic events (Ukraine-Russia conflict), a major development within the Bitcoin space has gone largely unnoticed. Fidelity, one of the world’s largest investment companies, announced on the 26th of April that they will be offering the chance to invest in Bitcoin through their 401(k) plans.

401(k) Overview

A 401(k) is a pension plan in the United States that is also sponsored by an individual’s employer, in which the employer may match the contribution or a certain percentage of what the employee contributes themselves dependant on company policy. A common example would be a dollar for dollar match by the employer for up to 3% of an employee’s salary. 401(k)s are primarily used as a long-term investment account, ultimately serving to provide for secure wealth and financial security upon retirement. Users of these pension plans may opt to invest in a variety of funds using Fidelity's and others' services. There are a range of investment strategies one can employ with their 401(k), whether it be allocations across bonds, emerging-market stocks or other asset classes. The strategy that an individual employs will be dependent upon their own risk tolerance and desired returns.

Fidelity currently has approximately 40 million users of its services and around $11.8 trillion in assets under management. This move to offer Bitcoin through 401(k) plans presents an exciting opportunity for traditional investors to gain exposure to this emerging asset. Once this service becomes available, Fidelity’s clients will directly be able to invest in Bitcoin through their pension plans without the need to interact with an exchange. This will make the introductory process for inexperienced and new investors with cryptocurrencies much more seamless. This may even open up capital pools among the older age groups due to the lack of exposure to hazards and being scared off from the emerging technology. Thankfully getting exposure to Bitcoin through 401(k)s is not limited to customers of Fidelity. At Caleb & Brown, we also allow our clients to allocate crypto to their self-directed IRA and 401(k) accounts without needing to navigate an exchange or order book.

The game theory of Bitcoin makes this institutional move a much more interesting affair, opening up the space to further mainstream adoption. Other pension services that compete for the same business as Fidelity's, such as Vanguard, Charles Schwab, and ADP, to name a few, are now potentially incentivised to make similar moves in allowing for Bitcoin exposure through their services to remain competitive. This therefore could trigger a wave of capital allocation for Bitcoin, with around 60 million active participants in 401(k) plans currently.

How does this change things?

This is with respect to retirement investment plans within the US only, and such movements, especially amongst major pension providers in the country, could spur other western countries to push for the same services for their populations. This in turn exposes the number of individuals who can now gain access to Bitcoin, increasing the potential demand for a fixed supply asset. Similar activity can already be seen in other countries. For example, in Australia the superannuation fund Rest Super became the first retirement fund within the country to begin getting some exposure to cryptocurrencies in an announcement made in November 2021. This again reinforces the demand for exposure to digital assets and in particular Bitcoin by long-term investment funds.

The investing style and strategy of 401(k)’s is another interesting dynamic to consider, given they are generally more passive and intended for longer-time horizons. This could lead to more long-term coin holders (aka HODLers) within the Bitcoin market, resulting in a greater amount of the supply becoming illiquid, a trend we have already begun to see develop since the previous bull run of 2017, with approximately 14.5 million of the 21 million deemed illiquid (to understand how this is measured see - https://bitcoinmagazine.com/the-hodl-model).

The 401(k) investor by default becomes a dollar cost average buyer due to the systematic nature of their buying, whether it being weekly or monthly instalments depending on their plan. In terms of supply and demand, it then increases the demand side of the market on a more consistent basis over longer durations rather than in short bursts, which has often happened following news stories or shifting sentiment (e.g., Tesla adding Bitcoin to their balance sheet). Such a move would push Bitcoin into further maturity as an asset class and portion of individual portfolios.

The Big Picture

Overall, Fidelity's move opens up a new chapter in which Bitcoin may become a viable investment option for traditional investors with long time horizons. The result of this will be a changing of market dynamics by possibly reducing the percentage of short-term speculation, which is commonplace with such a volatile asset. The volatile nature of Bitcoin has led the U.S. Labor Department to raise concerns about Bitcoin exposure through 401(k)s, and, by being the regulators of company sponsored pension plans, they wield significant powers within this space. This resistance is to be expected due to the difficult nature of controlling and regulating Bitcoin, especially as an extension of government whose currency is most commonly used.

All of these factors combine to create the stage for a very exciting 2022, and hopefully the maturation of this asset class within the traditional financial world and the many investment vehicles it possesses. Fidelity’s announcement, combined with nation state adoption, merchant acceptance, and financial market volatility, could potentially create a very rewarding environment for Bitcoin, though only time will tell.

Recommended reading: Invest in Bitcoin With These 3 Simple Steps: A Complete Guide