The biggest retirement plan provider in the United States, Fidelity, just announced plans to offer individuals the opportunity to invest in bitcoin through their 401(k) retirement accounts later this year. With 20 million plan participants accounting for $2.7 trillion in assets, Fidelity just brought a somewhat controversial strategy into the mainstream.
It’s not surprising that Fidelity was the first tradfi asset management firm to stake out its territory in this space – the company has been ahead of its peers in launching digital asset products under the tenure of CEO Abigail Johnson. It launched its first crypto-related offering in 2018 when it began to hold 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 can be seen as either laudable or risky, depending on whom you’re asking.
First, let’s start with the criticism, because skepticism over crypto’s expansion is understandable given the asset class’ reputation for scams and volatility. What’s more, it might not even be a good investment; bitcoin hasn’t proven itself to be an effective hedge against inflation and has lost over 40% of its value since peaking last November.
With that in mind, it’s easy to see why regulators don’t love the idea of allowing access to crypto in retirement accounts. The U.S. Department of Labor said in a directive last month that fiduciaries should “exercise extreme care” before doing so, citing crypto’s historical volatility, potentially inflated valuation, and fears about custodial issues given the near-impossibility of recovering crypto from a wallet if one were to forget their password.
And it’s not just regulators raising an eyebrow, though they seemingly have good reason to do so. Companies like Fidelity obviously have a profit incentive to launch crypto products because they can earn more fees, which begs the question of whether they’d expand into digital assets to make a buck while convincing average retail investors to shoulder all the risk. If crypto crashes, after all, retail investors could be left holding the bag after gambling away their retirement savings. That can’t be good, right?
If you want to allocate a reasonably small percentage of your savings to crypto, and you’re aware of the risks, it could make sense to put money into this growing asset class that could very well continue appreciating over the long term.
Wrong. Now, let me tell you why Fidelity offering crypto in retirement plans is a huge win for pretty much everyone who isn’t ultra-wealthy.
Crypto has promised to “democratize” a lot of things and largely hasn’t delivered. Individual wealthy “whales” have benefited from crypto’s rise to an extent that most average individuals haven’t. The wealthiest 82 individual crypto wallet holders account for almost 15% of the total supply of Bitcoin, according to River Financial.
One key factor behind why wealth is so concentrated in crypto, much like with other alternative assets, is that average investors don’t enjoy the same access to top-tier investment opportunities that the wealthiest folks have.
The demand for crypto investment opportunities clearly exists, though, and data show it is particularly strong among women and people of color, who see an opportunity to build wealth through the emergence of a nascent asset class. But average investors have been shut out of many of these opportunities through either regulation or a lack of infrastructure available to them.
Retail investors’ lack of access to premium investment opportunities is, of course, a much broader and more nuanced issue, but Fidelity’s announcement will help remove one particular barrier. While retail investors can fairly easily use a platform like Coinbase to purchase the most popular cryptocurrencies, there are no mainstream solutions that allow them to do so in a tax-advantaged way. A solution like this doesn’t exist in the mainstream yet because companies are hesitant to bear the regulatory and reputational risks associated with being the first to roll out a product that has been so heavily criticized by regulators.
Fidelity has decided that taking that risk is worth the tradeoff, and retail investors are likely to benefit as a result.