The biggest pension plan provider in the United States, Fidelity, just announced plans to allow individuals to invest in bitcoin through their 401(k) retirement accounts later this year. With 20 million participants in the plan worth $2.7 trillion in assets, Fidelity has just brought a somewhat controversial strategy into the mainstream.
Unsurprisingly, Fidelity was the first traditional asset manager to chart its territory in this space — the company was ahead of its competitors in launching digital asset products under CEO Abigail Johnson’s tenure. It launched its first crypto-related offering in 2018 when it started holding digital assets in custody for institutional investors.
The news marks a pivotal moment in the growing movement to expand access to alternative investments — a goal that could be considered laudable or risky, depending on who you ask.
Let’s start with the critique first, as skepticism about crypto’s expansion is understandable given the asset class’s reputation for scams and volatility. Plus, it might not even be a good investment; Bitcoin has not proven itself as an effective hedge against inflation and has lost more than 40% of its value since its peak last November.
With that in mind, it’s easy to see why regulators don’t like the idea of allowing access to crypto in retirement accounts. The US Department of Labor said in a directive last month that fiduciaries should “exercise extreme caution” before doing so, citing crypto’s historic volatility, potentially inflated valuation and fears of custody problems given the near impossibility of withdrawing crypto from a wallet. if one of them forgot their password.
And it’s not just regulators who are raising an eyebrow, though they seem to have a good reason for it. Companies like Fidelity clearly have a profit incentive to launch crypto products because they can earn more fees, raising the question of whether they would expand into digital assets to make money, while convincing the average retail investor to bear all the risks. After all, if crypto crashes, retail investors could hold the purse strings after throwing away their retirement savings. That can’t be good, can it?
If you want to spend a fairly small percentage of your savings on crypto and are aware of the risks, it can make sense to put money into this growing asset class that could very well continue to rise in the long run.
wrong. Now let me tell you why Fidelity’s offering of crypto in retirement plans is a huge win for pretty much anyone who isn’t ultra-wealthy.
Crypto has promised to “democratize” many things and has largely failed to deliver. Individual wealthy “whales” have benefited from the rise of cryptos to an extent that most average individuals do not. The richest 82 individual crypto wallet holders account for nearly 15% of Bitcoin’s total supply, according to River Financial.
A major factor behind why wealth is so concentrated in crypto, as with other alternative assets, is that average investors don’t have the same access to high-quality investment opportunities as the richest people.
However, cryptocurrency investment opportunities are clearly in demand, and data shows that it is particularly strong among women and people of color, who see an opportunity to build wealth through the emergence of a burgeoning asset class. But average investors are excluded from many of these opportunities by regulation or a lack of infrastructure available to them.
The lack of private investor access to high-quality investment opportunities is, of course, a much broader and more nuanced issue, but Fidelity’s announcement will help remove a certain barrier. While retail investors can fairly easily use a platform like Coinbase to buy the most popular cryptocurrencies, there are no mainstream solutions that allow them to do so in a tax-efficient way. A solution like this doesn’t exist in the mainstream yet, as companies hesitate to bear the regulatory and reputational risks associated with being the first to roll out a product so heavily criticized by regulators.
Fidelity has decided that taking that risk is worth the trade-off, and retail investors are likely to benefit.