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Want to Add Crypto to Your Retirement Portfolio? Here’s How, and What to Consider.

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With many cryptocurrencies surging last year as the overall market surpassed $3 trillion in value, a growing number of retirement savers are looking for ways to tap into the potential. Before joining the crowd, however, investors should get at least a basic understanding of the asset class, if not becoming experts themselves on the esoteric investments. 

For starters, investors will likely be on their own if they want to add cryptocurrencies to their investment mix as traditional individual retirement accounts and company-sponsored 401(k) plans typically don’t permit investing in crypto or other alternative assets. That leaves investors to dabble in digital currencies in self-directed IRAs or in taxable accounts. 

What’s more, crypto’s windfall-like rewards come with risks that can make it difficult for professional investors to stay in the green, let alone mom and pop investors. Digital currency has been the best-performing asset class in the world over the past three years, but it has also had multiple drawdowns of more than 50% during that time. 

“The market is new and changing fast,” says Matt Hougan, chief investment officer at Bitwise Asset Management. “Crypto investments can go to zero and there is no guarantee that the largest and most important assets today will remain so in the future.”

Barron’s spoke with a number of investment pros for some things to consider: 

Is it prudent to bet on crypto? 

A key argument for adding crypto to retirement savings is the diversification benefit of an asset class largely uncorrelated to traditional assets. Crypto is also touted by enthusiasts as an emerging asset class that maximizes returns relative to the risk investors are taking. And by investing in a qualified retirement account, any gains will be tax-deferred or tax-free, depending on the account style.

David Ramirez, chief investment officer at 401(k) provider ForUsAll, believes investors have more to lose by not making digital assets part of their retirement plans. “Choosing to not include cryptocurrency in a diversified long-term portfolio is a big bet,” he says. It’s “a gamble that markets are inefficient and that large institutional investors fundamentally misunderstand the potential of blockchain technology.” 

A small allocation to cryptocurrency in a diversified portfolio may be able to increase expected returns without materially increasing overall portfolio risk, he says. Indeed, a FTSE Russell simulation last year found that portfolios containing cryptocurrencies consistently outperformed those without cryptocurrency, and without meaningfully increasing risk. 

How can I fold crypto into my retirement plan?

The easiest way to buy crypto in a retirement account is through tax-free, self-directed IRAs and solo 401(k) plans. Investors can choose from companies such as Bitcoin IRA, BitIRA, iTrust Capital, and IRA Financial, among several others, that specialize in crypto-backed IRAs; big financial firms like Fidelity and Vanguard don’t allow individual investors to invest in crypto. Once your account is funded, you can trade digital assets inside your self-directed retirement account using the self-trading area of the platform. 

Then there are custodians, such as IRA Financial, that allow clients to invest in digital currencies directly via a crypto exchange. Investors can use their retirement funds to buy all the major cryptocurrencies directly through a U.S.-based exchange. The IRA holder has 100% control over the account and can trade anytime. 

Until recently, crypto investing was out of bounds for company-sponsored 401(k) plans. That changed in July 2021 when ForUsAll partnered with Coinbase Global to allow workers in plans it administers to invest up to 5% of their 401(k) contributions in Bitcoin, Ethereum, Litecoin, and other coins. 

While direct ownership can be an efficient way to gain exposure, Hougan cautions, “it takes a lot of monitoring, management and attention over time to manage those positions.” For some, professionally managed cryptocurrency-themed ETFs may be a better route to the crypto market, he says.

How much should I allocate? 

Key factors determining the size of crypto allocation include “one’s age, level of wealth, and appetite for risk and volatility,” says Adam Bergman, founder and CEO of IRA Financial Group, who holds about 5% of his investment assets in crypto. He concedes, though, “that may be a bit high for some individuals.” 

Considering crypto’s volatile nature, a little goes a long way. “Most investors we work with have between 1% and 5% of their retirement portfolio in crypto,” says Hougan.

With allocation comes periodic rebalancing. Crypto allocation needs to be routinely tweaked to keep it aligned with investment goals. “Since it can have such outsized returns, up and down, rebalancing can be even more important in crypto than in other assets,” says Hougan.

And what coins should I choose?

Crypto experts tend to favor blue-chip coins—core, established cryptocurrencies like Bitcoin and Ethereum, for instance—over upstarts. 

The selection of coins correlates to the level of risk investors are willing to assume. Bitcoin and Ethereum are the two largest cryptos and likely the least risky. However, they aren’t immune from price swings. Bitcoin has gone from a peak of $65,000 to $31,000 in just a few months in late 2021 and early 2022; it was recently trading around $45,000. 

The level of volatility could be considerably higher in smaller, less established cryptocurrencies. Yet some of the top-performing assets in 2021 have been altcoins like Solana, which popped more than 9,000%, and Dogecoin, up about 3,000%, compared with a 580% gain for Bitcoin for the same period. 

“To the extent people are taking a long-term outlook in their retirement accounts, crypto could be a good fit,” Hougan maintains.

What are some other risks?

As with many early-stage technologies, cryptocurrency faces unknowns and risks that make their prices volatile. The potential applications of blockchain technology—from supply chain management to banking—are undeniable, but the speed and extent of the technology’s adoption won’t be known for years. 

There’s also the risk of criminal activity, including theft and hacks. The short history of cryptocurrency is replete with instances of cyberattacks, leading to millions of dollars in losses.

And the recent crackdown on crypto mining and trading in China and the outright ban in several countries show that regulation could be a significant source of risk. 

Still, the risk of cybercrime can be offset in retirement accounts by ensuring plan custodians and exchanges have necessary safeguards and regulatory approvals in place. Meanwhile, diversification can protect against volatility.

“Having some basic belief that blockchain will revamp the way global financial markets will operate should be enough to get investors excited about the reward-risk proposition,” Bergman says.

Write to retirement@barrons.com

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