It is not a secret that cryptocurrencies haven't been the best performing asset class in 2022. While the stock market is officially in a bear market, the crypto market has lost much more.
While crypto’s critics seem more vocal than ever, supporters consider it as a buying opportunity — especially when they can use it to diversify their portfolio.
In April, Fidelity Investments announced it would soon introduce Bitcoin as an asset for traditional 401(k) investments. Since Fidelity has about $2.7tn of 401(k) investments under management, this was a significant development for the cryptocurrency market.
With individual retirement accounts (IRAs), employees select how much of their contribution should go toward each investment. For now, Fidelity has decided to limit cryptocurrency to 20% of a portfolio, likely due to its high volatility.
Benefits of Adding Crypto to a Portfolio
- High Upside Potential: Crypto has minted countless millionaires of those who got in early and held through the massive upswings and downswings over the past decade-plus. Though the market is down this year, every time Bitcoin and the greater crypto market has seen a significant downturn, it has eventually rebounded to soar past previous highs.
- Diversification: Stocks and bonds traditionally dominated retirement investments over the decades. Yet, crypto offers an opportunity for younger generations that are looking to diversify. According to National Bureau of Economic Research and Western Sydney University research, cryptocurrency doesn’t significantly correlate with traditional assets, though this year it has moved directionally with the equities market.
Risks of Adding Crypto to a Portfolio
- Higher Volatility: Cryptocurrency swings from highs and lows are not for the faint of heart. Even in the long term, it has double the volatility of Nasdaq, one of the most volatile indices. Thus, investors obsessing about short-term holdings might want to skip cryptocurrencies in their retirement portfolios.
- Risk of Fraud or Collapse: The crypto market is still young and largely unregulated. Although historical returns are attractive at first, it comes at a higher risk of fraud or collapse.