A common question I get asked is, "Can I buy Bitcoin and place it in my 401(k) plan for retirement?"  My answer has always been, "No, because Bitcoin is not a stock, mutual fund, or savings vehicle that qualifies as an investment for that type of account,".

It turns out that my answer has not been 100% correct.  I found out this week that there is a way for individuals to acquire Bitcoin for their 401(k) plan.  The shares you would need to buy are issued by Grayscale Bitcoin Trust (GBTC).   

Does Grayscale Bitcoin Trust own any Bitcoin directly?

Yes, the trust currently owns roughly 225,637.892 BTC at the time of writing.   This represents just over 1% of all the 21 million Bitcoin that will ever be mined. 

There are a total of 229,663,900 shares of the trust outstanding, resulting in ownership of 0.00098247 BTC/share.  So buying shares of GBTC provides you indirect ownership of Bitcoin, without needing to deal with any security and custody issues.  This is the closest thing to a Bitcoin ETF as you can get at the moment.

If this is an investment trust, what are the management fees?

There is an annual fee of 2%.  Because Bitcoin does not generate dividends, or earnings, the only way for the 2% to be covered is by the trust selling off some of their Bitcoin holdings periodically.  The ownership ratio of BTC/share will slowly decrease over time as Bitcoin is sold off.

Related reading: Will Disney Acquire Any Bitcoin?

The math doesn't add up...Why is there a price premium on the shares?

Currently, each share is entitled to $5.21 worth of BTC.  However, the last traded share price was $6.71, which represents a roughly 28.8% premium over the market value of the Bitcoin.  One analyst explained this was due to institutional investors who are now starting to buy in.

Rise in premium is a sign of institutional net buying (easier to buy this ETN from @GrayscaleInvest than buy via a crypto exchange)... - Tom Lee, Fundstrat Global Advisors

What are the advantages to buying GBTC for my 401(k)?

At the heart of this issue remains the fact that a 401(k) is a retirement savings plan allows workers save and invest a piece of their paycheck before taxes are taken out.  It allows you to buy Bitcoin indirectly, and not get taxed on any gains until you withdraw the funds.

Also noteworthy is that Grayscale offers a selection of trusts that hold other cryptocurrencies, such as Ethereum, Bitcoin Cash, and Stellar Lumens.

Related reading: Has Stellar's $125,000,000 Lumens Airdrop Ended?

What are the risks associated with buying GBTC for my 401(k)?

1. If a true Bitcoin ETF was to gain approval by the SEC to begin trading, there's a high likelihood the share price of GBTC would drop.  ETF's have lower management fees than most, if not all mutual funds, let alone the 2% charged annually by GBTC. 

2. The volatile nature of cryptocurrencies results in the value of the trust potentially rising and falling dramatically.  If you are close to retirement, it would be advisable to reduce your exposure to high risk investments.

3. One item in the fine print on the Grayscale Bitcoin Trust reads as follows..."Shares in the Products have not been recommended by any U.S. federal or state or non-U.S. securities commission or regulatory authority, including the SEC. Furthermore, the foregoing authorities have not confirmed the accuracy or determined the adequacy of any information on this website or in the Offering Documents."  Invest at your own risk!

If you can afford to allocate 1-2% of your retirement portfolio towards crypto, why not?

Disclaimer:  I am not a financial advisor.  Cryptocurrencies are highly volatile investments.  Please consult with a certified financial planner for financial advice that is suitable for your particular situation.

Cover art: Image by 3D Animation Production Company from Pixabay

Last edited on September 11, 2020

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