Bitcoin in Your Retirement Portfolio: New Study Shows Potential Income Benefits

The answer could be yes.

A new Fidelity study shows that adding a touch of Bitcoin to a retirement portfolio can improve income and spending during our golden years. The answer may be to ride out the volatility over the long haul.

The basics behind cryptocurrencies like Bitcoin are pretty easy to understand. These digital dollars are stored in the cloud or digital key. With no central bank like the Federal Reserve or regulatory authority backing them up, they use cryptography/encryption to secure transactions and to control the creation of additional units of the currency. The idea is that Bitcoin can serve as a medium of exchange or be traded between parties.

The medium of exchange part is where it gets volatile for the asset class. Right now, not many places will accept Bitcoin for goods and services. The only current ‘use’ is trading Bitcoin to another party on the idea that it will be used as an exchange medium. As such, Bitcoin has been on a roller coaster ride since its creation in 2009.

Nonetheless, the potential of Bitcoin has finally been recognized by Wall Street and more legitimate financial providers. In recent times, exchange-traded funds (ETFs) tracking spot Bitcoin prices have launched from a variety of providers including BlackRock, Invesco, and Franklin Templeton. This is on top of existing Bitcoin Futures-based ETFs. Fidelity has now set up a crypto brokerage service, while the CME now offers Bitcoin futures on its exchanges.

With this, Bitcoin has now entered the lexicon of being a real financial asset class, perhaps moving beyond its previous mania status.

The question now is whether or not Bitcoin is simply reserved for speculation or whether it deserves a spot in your portfolio, right alongside stocks, bonds, and other alternatives. According to a new Fidelity study, the answer may be yes. It turns out that adding a dose of Bitcoin to a portfolio may improve outcomes and boost retirement income potential over the longer haul.

According to Fidelity, Bitcoin may be the alternative that many portfolios need. The digital currency is a unique asset class in that it blends the scarcity of gold—there is a finite number of Bitcoins to be minted—and it provides the adoption curve potential of a disruptive technology. In a portfolio, Bitcoin can serve to improve outcomes since it provides non-correlated returns to a typical stock/bond mix that follows a traditional glide path into retirement.

As for those returns, Fidelity shows that a touch of Bitcoin under several allocations and optimistic and worst-ccase scenarios can provide more income potential. Through Monte Carlo simulations and looking at a best-case scenario or worst-case scenario (Bitcoin goes immediately to $0), Fidelity found that with Bitcoin weighting of 5%, a 65-year-old investor could potentially see an 8.5% gain in annual retirement spending potential. Conversely, if it were to fall to $0, they would lose about 3% in annual spending. For younger investors, there would be a 5% upside, but only a 1% reduction. This is due to their longer timelines and ability to ride out volatility during the early stages of Bitcoin adoption. ¹.

This graph from Fidelity research shows the potential spending outcomes for various age brackets.

_Source: Fidelity Institutional

Looking at different allocations to Bitcoin, the study also shows higher upside potential to annual retirement spending versus downside losses. For example, a 40-year-old with a 2% allocation to Bitcoin could realize 4% more in annual retirement spending if things go right, or only lose 0.5% in spending potential if Bitcoin were to go to zero.

The Fidelity study is certainly interesting and echoes other research that suggests that Bitcoin’s non-correlated status can provide much-needed diversification. Should investors follow Fidelity’s advice? These days, it’s a lot easier and safer to do so.

Thanks to the growth of regulated products such as ETFs, and the ability to buy Bitcoin through reputable brokerage houses or even established finance firms like PayPal, it has become simpler to get your hands on digital assets. The sheriff is not entering the ‘Wild West’ of finance.

Perhaps the easiest piece is that, according to Fidelity’s work, it only takes a small weighting to the asset class to make a difference. Some studies on other liquid alternatives make the case for holding as much as 30% of a portfolio in things like market-neutral funds, managed futures, etc. That can be a hard pill for many investors to swallow. A 1% to 5% allocation? Not so bad.

These ETFs were selected based on their exposure to spot Bitcoin and are sorted by their AUM, which ranges from $300M to $27B. They have expense ratios between 0.19% to 1.50% and they currently do not pay any dividends.

Overall, Bitcoin and other digital assets are starting to become safer and more well-regarded among the Wall Street elite. That’s a positive for the asset class. And now, with plenty of choices for exposure, we can finally start to introduce Bitcoin into retirement plans. And according to Fidelity, that’s a good thing and could potentially improve future spending needs.

With the advent of new regulated products, Bitcoin is going mainstream. That’s wonderful news as adding it to a portfolio can provide a spending boost under the right scenarios without taking too much downside risk. For investors, it could be the alternative investment they are looking for.

¹ Fidelity (May 2024). Institutional Insights: The case for bitcoin