Does Bitcoin Belong in your 401k?

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I don't think we're even close to peak institutional adoption. There are such fantastic companies and businesses that are building the tools around trading crypto, order management systems, indices, you know, the kinds of tools that investors are used to seeing in other asset classes.

Welcome to the Barron's Streetwise Podcast. I'm Jackson Cantrell. The voice you just heard is Michael Sonnenshein. He's the CEO of Grayscale Investments, and it runs the largest Bitcoin fund on Earth. Over the past few years, hedge fund managers, big public companies, and now the nation's largest 401(k) administrator have warmed to crypto. But does Bitcoin deserve a place in your retirement account? In a moment, we'll hear from Michael and an asset researcher who says crypto has gone from meme to mainstream. Plus, a fund manager explains why he allocates to gold and Bitcoin. Listening in is Streetwise's former producer, Meta. Hi, Meta.

Hey, Jackson.

Our friend and the host of this podcast, Jack Howe, is on vacation and I'm filling in. Now, Jack's face is on the COVID of this podcast, so it's safe to say listeners are not expecting me. And frankly, I'm a bit nervous. So I'm asking myself, WWJD.

What would Jesus do?

No, what would Jack do?

Oh, okay.

Like looking at balance sheets, simplifying complicated investing concepts.

I was thinking more just general oversharing, like going on tangents about the history of lawn care equipment.

Oh, don't forget 1980s pop culture references.

Party time. Excellent. Back in November, we released a podcast titled Investing Has Never Looked Weirder. We talked about the eye-watering prices of meme stocks like AMC and GameStop and obscure cryptocurrencies like Dogecoin. I even found myself at an NFT convention in Times Square where I met a dancing worm and snuck into a party restricted to owners of a $50,000 digital ape cartoon. That party was about as fun as it sounds. Since that episode, many of those weird assets have come back down to earth. Shiba Inu coin, that parody of Dogecoin, which itself is a parody of Bitcoin, is down over 75% since its peak last October. AMC and GameStop stocks have recently hovered around 70% below their market tops. And on Wednesday, the Wall Street Journal wrote about the decline of NFT sales volume, like those digital ape cartoons I was talking about, that has dropped 92% since September of 2021. It seems like investors are taking a breather from the weird finance jamboree. That is, retail investors. Bitcoin, the oldest and biggest cryptocurrency, continues to win over institutions, even as its price has tumbled 40% off all-time highs. In April, CNBC reported that many of the major US banks, including Wells Fargo and Bank of America, were on a hiring spree for crypto-related jobs. Then last week, Goldman Sachs issued the first Bitcoin-backed loan from a major US bank. And last month, Fidelity announced it would offer Bitcoin as an option in its 401(k) retirement plans.

The move, which is set to take place later this year, would allow users to allot up to 20% of their nest egg in Bitcoin.

Fidelity is America's largest retirement savings administrator, and its Bitcoin plan goes where competitors had deemed too risky. To make sense of the move, I reached out to Roxana Islam, an asset research director at Alarion.

Their decision was, I would say, bold and unique. They have said that this was in response to investor interest in having it in their 401(k)s. You know, I believe the number that they stated was you could have up to 20%, which seems very high to a lot of people. You know, it's already received a bit of pushback from the Department of Labor, who had already been sort of against the whole idea of crypto in 401(k)s.

Ali Khawar, the Department of Labor official in charge of employee benefits, recently expressed his concerns to Barron's. He thinks some of the 23,000 companies with plans under Fidelity might feel pressure to add Bitcoin to their employees' 401(k) options out of a fear of missing out.

Roxana says Fidelity is responding to interest from younger investors, especially younger people, millennials, Gen Z. They're very much interested in Bitcoin, digital assets, etc., because, you know, their whole life sort of revolves around tech. Like, they're always on social media and TikTok and Facebook and all that. So they're really interested in something that's not just, you know, a boring old stock.

Fidelity has been pretty vague about its investment case for Bitcoin. Its press release says the 401(k) move reflects a belief in the, quote, "promise of blockchain technology for the financial industry's future." I think a more straightforward reason Fidelity is offering Bitcoin is it's afraid of losing customers. A 2021 Motley Fool survey of 18- to 24-year-olds found that Fidelity's service was less widely used than that of startups Robinhood, Stash, and Acorns. Meanwhile, a recent Investopedia survey found that more millennials own cryptocurrency than stocks, albeit just a tad more—38% versus 37%. Roxana says this familiarity with crypto could push some retirement savers towards 401(k) Bitcoin options without fully understanding the risks.

One of the main worries is that, you know, people will see it as an option and they'll be like, oh, Bitcoin, how cool, you know, I know someone who made 200% profit off of Bitcoin, maybe I should put 20% of my portfolio in it.

So why would someone want Bitcoin in their 401(k)? One argument I've heard is that Bitcoin offers a chance at life-changing returns in exchange for taking on high risk. But does it? I've mentioned before a 2021 paper by Morgan Stanley that looked at Bitcoin's effect on a 60/40 stock-bond portfolio. It found that a 2.5% Bitcoin allocation would have added an extra 1.64% annual return between January of 2014 and September of 2020. That's a significant boost. There's a huge caveat though. To repeat that performance, Bitcoin would have to rise another 2,800% from where it is today. And that would take the total market value of Bitcoin to $22 trillion. Or just under US GDP, and over the total value of all dollar-denominated paper money and personal and commercial bank accounts combined. I don't see that happening. One benefit Roxana sees from owning Bitcoin is a chance to profit if it becomes more widely adopted as an asset class. She thinks institutional investors will continue to lower Bitcoin's volatility And that would be positive for its price. Another common investment case for Bitcoin is the digital gold angle. Proponents say because the supply of Bitcoins is capped, it holds its value during times of high inflation. Also, since it's not correlated with stocks or bonds, it can help dampen portfolio losses during sell-offs. Roxana thinks that recent price moves have thrown a wrench in those arguments.

Initially, a lot of people were thinking about it as sort of an inflation hedge, maybe similar to gold. And I think what the past few months especially has shown is that it's definitely not the same sort of asset class as gold is when it comes to inflation, particularly because we're seeing the correlations of Bitcoin and equities rise to levels that we haven't seen since the peak of the pandemic in 2020. And, you know, and not just even general equities, they're trading a lot with the broader tech stocks as well.

So Bitcoin is becoming more correlated with tech stocks. It's also down 30% over the past 12 months, so it hasn't held up against inflation. Is it time to put the digital gold argument to rest? One portfolio manager says not so fast.

I think the problem with that argument is that The window is too narrow.

That's David Shassler. He's the head of Quantitative Investment Solutions at VanEck. He also manages the VanEck Inflation Allocation ETF.

I can make those same arguments for gold right now if I'm just looking at a very short window. So let me expand on that a little bit. Gold's only up a couple percent this year. So is it performing as a true inflation hedge so far? I would argue no. It's been a diversifier. It's generating a stable return stream. But we think as the inflation cycle matures, you'll see gold start to perform as it did during previous inflation cycles. Now, Bitcoin has a very, very small history that has never had high inflation.

David thinks it's too early in the inflation cycle to count Bitcoin out. He says its limited supply will help it gain ground against major currencies, which can be devalued by money printing.

Alternatively, it's still a differentiated asset. It's got a unique return profile, a unique correlation profile, and that in itself is worth a lot as well.

The ETF that David manages, ticker RAAX, has a 1.5% allocation to Bitcoin. That's through a Bitcoin-backed ETF listed in Canada. Among professionals who invest in Bitcoin, David might even be on the more conservative side. Last month, Nasdaq ran a survey of 500 financial advisors who are currently or considering allocating to crypto, and it found that their average ideal crypto allocation was 6%. David says his ceiling is 3%. He acknowledges that Bitcoin is much more volatile than gold, but he thinks the wild price swings are an opportunity.

The pushback most people give now is, well, Dave, How can something with a 70% annualized standard deviation, which is what Bitcoin's running at right now, possibly be a store of value asset? That's where we would gently push back and say, that's actually the opportunity. Because from a capital allocation perspective, it makes a lot of sense. You need a very, very small allocation to Bitcoin to get potentially a reasonable size impact in your portfolio.

Clay Finck: I asked David what it would take for Bitcoin to lose its usefulness as an investible asset class. He says if after 3 years Bitcoin remains correlated with tech stocks and doesn't keep pace with inflation, its prospects will start to look shaky. For now, his hope is that Bitcoin will become less volatile over time and will again lose its correlation with stocks.

The hope would be that the volatility profile would continue to fall. Now, does it go to 15 like gold? I think there's a very, very small chance of that. But does it go from 70 to 50? Well, that's totally possible. Over time, we'll continue to fall. That would be the hope, because if that's the case, then I think the store of value argument, the diversification, how much people are willing to own, I think that all goes up over time. Then it's a bigger, more meaningful part of people's portfolios.

Preston Pysh: Roxana from Ellarian thinks another key piece of Bitcoin's move from the financial fringe into the mainstream is the approval of a Bitcoin-backed ETF in the United States.

If there is a spot ETF eventually, you know, I think that would open up investment options for a lot of investors that may not be comfortable with that direct Bitcoin investment.

In a moment, we'll take a look at the prospects for that ETF that Roxana just mentioned after this short break.

Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.

Welcome back. Grayscale Investments runs the world's largest Bitcoin fund. It manages around $32 billion. In October, the company applied to the SEC to convert its flagship Grayscale Bitcoin Trust into an ETF. If approved, the fund would be listed on a major exchange and could be more easily traded by investors. Its CEO told Bloomberg that a lawsuit is, quote, on the table if their application is denied. To learn more about the fund and its ETF push, I caught up with CEO Michael Sonnenshein.

Grayscale Bitcoin Trust is solely and passively invested in Bitcoin. It is actually identical from a legal structure to what you see in a lot of commodity ETFs like GLD for gold and others like it. Today, the fund has tens of billions of dollars of assets in it, holds about 3.4% of all Bitcoin in circulation. And the fund has been publicly traded since May of 2015. So as an investor, if you have a brokerage account, a retirement account, whatever it may be, and you want to gain exposure to Bitcoin but do it alongside your stocks, your bonds, your ETFs, your mutual funds, well, GBTC allows you to go and do that.

Excuse me for a quick detour here. One of our listeners, Dan from Houston, asked us in an email how investing in shares of Grayscale's fund is different from buying Bitcoin itself. In order to buy Bitcoin directly, you need to create a digital Bitcoin wallet to hold the crypto you purchase. Having your own wallet gives you the flexibility to send and receive Bitcoin directly to and from other wallets. But if you forget the password to your wallet, too bad, your Bitcoin is lost forever. You You can also buy Bitcoin through second parties like Coinbase and PayPal, who'll hold your Bitcoin for you. A Bitcoin-backed fund like Grayscale's GBTC works a little differently. Accredited investors who make a minimum investment of $50,000 can buy into that fund directly. Grayscale will convert those dollars into Bitcoin, which the company stores, and investors receive equivalent shares of Grayscale's fund. The company charges a 2% annual management fee. After an initial lockout period of 6 months, those investors can sell their shares on secondary markets where anybody can purchase them. Shares of GBTC currently trade at around $25 and, unlike Bitcoin, can be held in brokerage or tax-advantaged accounts. One last point on GBTC. Each $25 share is backed by $34 of Bitcoin. That sounds like a screaming deal, but it's complicated because there's no way to redeem shares for the underlying Bitcoin. That would change if Grayscale's ETF were approved.

What's really interesting for investors is if they're thinking of deploying a dollar into Bitcoin today, they can either figure out how to buy Bitcoin directly, which a lot of investors do, Or they can take that same dollar or even a portion of it and buy shares of GBTC, essentially buying themselves Bitcoin exposure, but at, you know, $0.75 or $0.80 on the dollar, which is a really interesting investment opportunity if you have the right time horizon and ultimately believe that GBTC will convert to an ETF.

Michael says that converting GBTC into an ETF would eliminate that discount. Similar gold ETFs rarely trade more than 1% off the underlying asset price. Michael is hopeful the SEC will approve his ETF conversion. He points to the agricultural ETF provider Tucrium Trading. In April, Tucrium received SEC approval to list a Bitcoin futures-based ETF. Critics doubt regulators will be convinced by Grayscale's argument. Tucrium's ETF was approved because the Bitcoin futures backing it trade on a regulated exchange. Trading of Bitcoin itself is mostly not regulated. But Michael says it doesn't make sense to treat the two products differently.

The futures contracts themselves get their pricing from the underlying Bitcoin spot exchanges, much the same way that a Bitcoin ETF itself, a spot ETF, a spot Bitcoin ETF would get its pricing from the underlying spot exchanges. So the discrepancy there and the fact that the SEC isn't treating these two issues alike is quite concerning and something that I think many investors are really advocating for and are upset about.

Michael says that approval for spot ETFs would give Bitcoin investors more choices and would allow Grayscale to lower its 2% fee. ETF approval or not, he says that financial institutions are already on their way to treating Bitcoin like a mature asset class.

I don't think we're even close to peak institutional adoption. There are such fantastic companies and businesses that are building the tools around trading crypto, order management systems, indices, you know, the kinds of tools that investors are used to seeing in other asset classes.

Thank you, Michael, Dan, Dave, Roxanna, and thank all of you for listening. The Streetwise Podcast is hosted by Jack Kow, who will be back next week, and produced by me. Thanks to Meta Lutzov, Katie Ferguson, and Dan Lamb. Melissa Haggerty is our executive producer. Subscribe to the podcast on Apple, Spotify, or wherever you listen. And if you haven't yet, Write us a review. See you next week.

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