Cryptocurrency has taken the world by storm over the past few months, and it could soon be coming to your 401(k).
ForUsAll, a 401(k) plan provider, has teamed up with cryptocurrency exchange Coinbase Global (NASDAQ:COIN) to allow investors to allocate up to 5% of their 401(k) contributions toward cryptocurrency, as reported recently by The Wall Street Journal.
Four hundred employers offer 401(k) plans through ForUsAll, and if yours is one of them, you could have the opportunity to start investing in cryptocurrencies simply by contributing to your 401(k).
This partnership will make it much easier to invest in cryptocurrencies. Typically, that involves buying your currency of choice through a crypto exchange -- not a normal stock exchange. You would also need to keep your cryptocurrency tokens stored in a digital wallet rather than a typical brokerage account like you would when investing in stocks.
If you're able to invest in cryptocurrency through your 401(k), however, it's much more accessible. But is it a smart investment? Here's what you need to know.
Cryptocurrency may be the hottest new trend in the investing world, but that doesn't mean it's safe. It has proved that it can be incredibly volatile and subject to steep falls at the drop of a hat.
Case in point: Since its peak in mid-April, the price of Bitcoin (CRYPTO:BTC) has plummeted by nearly 40%. That's not the worst Bitcoin has seen, though; it's fallen by more than 80% on several occasions over the years.
And Bitcoin isn't the only cryptocurrency subject to volatility. Ether (CRYPTO:ETH), the second most popular cryptocurrency behind Bitcoin, lost nearly 94% of its value back in 2018. And Dogecoin (CRYPTO:DOGE) saw its price drop by more than 40% in the span of just two weeks last month.
All investments can be volatile at times, but cryptocurrency is far more turbulent than the average stock. If you're preparing for retirement, that type of volatility can be unsettling.
Also, cryptocurrency is still highly speculative. Unlike stocks, which have provided consistent growth over the long run, nobody knows what the future has in store for crypto. It could end up transforming the world's currency systems, or it could crash and burn. And if it fails, you could lose all the money you've invested.
This isn't to say that cryptocurrency is a bad investment. But whether or not you choose to invest depends on your timeline and your tolerance for risk.
If you have money to spare and plenty of time before you retire, investing in crypto might not necessarily be a bad move. Just make sure the rest of your savings are behind strong investments so you don't lose everything if cryptocurrency doesn't work out.
In addition, if you choose to invest in cryptocurrency, only invest money you would be comfortable losing. Because it's such a high-risk investment, you don't want to bank your retirement on it and potentially jeopardize your financial future.
On the other hand, if you're close to retirement and can't afford to take a chance with your savings, it's probably best to avoid cryptocurrency for now. Similarly, if you're a risk-averse investor and you know that you'd lose sleep if crypto prices crash again (which they very likely will at some point), then it may not be right for you.
Regardless of whether you contribute a portion of your 401(k) savings toward cryptocurrency or not, make sure you're taking the decision seriously. Crypto isn't right for everyone, and for some people, there are much better investments out there.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.