Crypto is a particularly risky investment for families trying to save for retirement.

The federal government offers the following guidance to workers who are considering increasing their retirement holdings of bitcoin or another cryptocurrency: Don’t.

The suggestion is not exactly fresh. The Department of Labor, which regulates 401(k) and other employer-sponsored retirement plans, first cautioned plan sponsors to “exercise extreme care” before allowing cryptocurrency investments in those plans in March.

The agency noted that there is a “significant risk of fraud, theft, and loss” associated with these investments, which “present significant risks and challenges to participants’ retirement accounts.”

Since then, it has only become clearer how dangerous cryptocurrency markets are for investors.

They were highlighted by the demise of FTX earlier this month, a well-known cryptocurrency exchange, whose founder, Sam Bankman-Fried, had taken on the role of the youthful spokesman for the safety of those markets and their potential for investment gains.

On November 11, FTX declared bankruptcy amid claims of financial wrongdoing and evidence of egregiously negligent and disorganized internal operations. It was the second significant player in the market to declare bankruptcy in the previous four months, following Celsius Networks, which had also been regarded as a high-flying and reliable competitor.

The abrupt collapse of Celsius, which had 1.7 million customers, resulted in its bankruptcy filing on July 13.

Fidelity Investments, which manages retirement plans for approximately 35 million enrollees and $1.4 trillion in assets, has been among the firms leading the charge. Earlier this year, Fidelity made the announcement that it would start enabling plan sponsors to give their employees the choice of investing in bitcoin.

Is that a prudent policy? Democratic Senators Tina Smith of Minnesota, Dick Durbin of Illinois, and Elizabeth Warren of Massachusetts disagreed. They requested Fidelity to think again in a letter dated Nov. 21.

The lawmakers’ letter was a response to one they had previously written on July 26 in which they had referred to Fidelity’s choice as “immensely troubling.”

“It seems ill-advised for one of the leading names in the world of finance to endorse the use of such a volatile, illiquid, and speculative asset in 401(k) plans—which are supposed to be retirement savings vehicles defined by… steady returns over time,” they wrote. While the employer sponsors of their plans ultimately decide whether to permit employees to invest in bitcoin through their 401(k) plans, they noted that “it is up to the employer sponsors to determine whether to permit such

Such observations don’t seem to affect faithfulness; instead, it defends their own standing for probity.

A Fidelity spokesman told me via email that recent events in the digital assets sector have further highlighted the significance of standards and safeguards. Fidelity has been a company that serves customers in the financial markets for over 75 years, and across all of its businesses, it has always placed a priority on operational excellence and customer protection.

However, for families trying to save for retirement, cryptocurrency is a particularly risky investment.

Traditionally defined benefit plans have been replaced by defined contribution retirement plans like 401(k) plans by most employers in recent years. The latter offers retirement benefits based on an employee’s salary and length of employment.

Defined contribution plans’ retirement payouts are based on the money that employees set aside for investments and any investment gain those funds make over time.

Both systems have advantages and disadvantages. Employees who work for a single employer for an extended period of time benefit most from defined benefit plans. Although the employer is responsible for assuming this risk, it typically cannot be transferred to a new employer.

Plans with defined contributions can follow employees as they switch employers because they are portable. However, workers bear the risks of market downturns.

These risks have materialized in real time for 401(k) plan owners. According to Fidelity, the average balance in those plans fell by 23% in the third quarter of this year compared to the same period last year. According to Vanguard, which competes with Fidelity as a manager of defined contribution plans, the average plan held about $129,000 at the end of 2021.

That’s false, though, as the average figure is inflated by the extravagant retirement accounts held by wealthier workers. Only about $33,500 was held by all account holders as the median holding or the amount that sits in the middle of their respective asset holdings.

These statistics highlight the risks of selecting subpar investments for one’s 401(k). They clarify why the Labor Department’s regulators were concerned about Fidelity’s initiative.

The agency refrained from issuing a firm rule to regulate defined contribution investments in part because doing so would have necessitated a protracted period of analysis and public comment. In its place, the authorities sent a less formal advisory to plan fiduciaries or the corporate managers in charge of employee retirement plans.

According to federal law, fiduciaries are required to “adhere to an exacting standard of professional care” and “act solely in the financial interests of plan participants,” according to the Labor Department. Fiduciaries who violate these obligations are personally responsible for any losses the plan incurs as a result of the violation.

Five potential pitfalls in cryptocurrency investments were identified by the regulators, and their weight would determine whether it was wise to offer the choice. Cryptocurrency is “highly speculative” and its prices are incredibly volatile in part due to “the amount of fictitious trading reported, widely publicized incidents of theft and fraud, and other factors,” according to the report. The market has been overly promoted as having “unique potential for outsized profits,” despite its complexity.

The regulators observed that published cryptocurrency valuations were unreliable and that recordkeeping was frequently sloppy. Finally, regulations and enforcement are still evolving, so it’s unclear whether some crypto offerings are even legal.

All of these problems are related to FTX.

The Department of Labor effectively warned employers that their decisions to permit employees to invest in cryptocurrencies would be closely examined.

Crypto promoters vigorously resisted the Department of Labor’s warning at least through the end of October, before the FTX meltdown.

The company ForUsAll, which administers 401(k) plans for small businesses and has assets under management of only a modest $1.7 billion, launched the most direct attack. ForUsAll is based in Silicon Valley. The company provides 401(k) plans that enable employers to permit employees to invest a certain amount of money in cryptocurrencies.

In June, ForUsAll filed a federal court lawsuit against the Labor Department in Washington, D.C., claiming that the agency’s crypto advisory was against federal regulations requiring that such initiatives be subject to public comment and other administrative procedures. The agency, however, was interfering with “the rights of American investors to choose how to invest money in their own retirement accounts,” which was their main beef.

In announcing the lawsuit, ForUsAll Chief Executive Jeff Schulte stated that the agency serves several important roles that benefit American workers, but “armchair financial adviser” should not be one of them. He charged the department with attempting to “pick winners and losers” across asset classes.

In October, the government requested that the court dismiss the case on the grounds that the guidance did not constitute rulemaking that was subject to administrative procedures. The government was then asked to promise never to prohibit cryptocurrency investment in retirement plans by viewing it as a breach of fiduciary standards, among other conditions, in response to ForUsAll’s offer to drop the case. The terms set forth by the company were rejected by the government.

The Crypto Council for Innovation, a coalition of cryptocurrency promoters that includes venture capitalists, cryptocurrency exchanges, and Fidelity, is also opposed to the Department of Labor’s advisory.

The council expressed dissatisfaction with the advisory in a letter dated June 14 to the department, claiming that it “in effect categorically prohibits 401(k) administrators from including crypto investment options in their plans, based on a factually and legally flawed analysis.”

The council claimed that the advisory “single-mindedly considers only the risks of cryptocurrencies while ignoring their potential benefits, including growth and portfolio diversification.”

Promoters of cryptocurrencies continued to believe that the public was becoming more interested in the asset class, making it a promising sector for business growth—at least until the FTX collapse. There have undoubtedly been many doubters. Jamie Dimon, the CEO of the sizable bank JP Morgan Chase & Co., is one of them and has consistently mocked bitcoin and other digital currencies. In his testimony before Congress on September 21, Dimon called them “decentralized Ponzi schemes.  And the idea that it’s beneficial to anyone is absurd.”

It’s possible that coverage of FTX’s demise in the news and information about its internal squabbles will make Americans less interested in the investment category.

There seems to be more skepticism as one online sportsbook, Bet Online, has started taking bets on “the next cryptocurrency exchange to declare bankruptcy.” (The exchange that paid to put its name on the former Staples Center, the Los Angeles location where the NBA Lakers and Clippers play, was Crypto.com. It was the betting favorite during the pre-Thanksgiving period.)

Alternatively, it’s possible that the chance of making quick money will outweigh the risks associated with entrusting one’s priceless retirement savings to investment companies that operate according to their own set of rules or none at all. Whatever evidence there may be of a product’s dubiousness, nothing will stop average Americans from purchasing it. But no one can claim they weren’t warned.

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