Every pension fund should buy Bitcoin
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Every pension fund should buy Bitcoin.
The retirement of hundreds of millions of corporate and government employees around the world depends on these pension funds’ ability to pay the individual a set amount of money post-retirement. Unfortunately, many pension funds are facing a significant crisis — it does not look like they will be able to pay their future obligations.
The difference between the obligations and the resources allocated to pay them is actually widening. This is driven by a decreasing worker to retiree ratio. Workers pay into the pension fund (think of this as revenue for the pension fund) under the promise that the fund managers will grow the capital and be able to pay the employee’s pension post-retirement. Once an employee retires, they begin to draw their pension (think of this as expenses for the pension fund) and will continue to do so until they die.
The gap between revenue and expenses is getting worse because of lower birth rates (fewer people entering the workforce) and longer life expectancy (the retirement age stays fixed so people are entitled to their pension for longer). Each of these trends is expected to continue, and possibly even accelerate, which will put additional pressure on pension funds to come up with the capital needed to fulfill their obligations.
There are numerous potential solutions to address the problem. One is to increase the amount of contributions from workers (increase revenue) and another is to grow pension funds’ capital by investing it at higher rates of return. To identify the right answers, each fund hires an actuary to model a pension fund’s future outlook. These actuaries look at demographic data, life expectancy, investment returns, levels of contributions or taxation, and payouts to beneficiaries.
The most important number is the “actuarial assumed rate of return,” or the target return on invested capital that is necessary to have enough resources to pay out future obligations to retirees. This assumed rate of return is typically between 6-8% annualized. As this number is adjusted up or down, the current workforce is directly impacted. Some estimates show that a decrease from 8% to 7% from the actuarial assumed rate of return would require workers to contribute up to 10% more to the pension. Not exactly an exciting idea for those currently working.
Either way, pension funds have to do something different. The definition of insanity is to continue doing the same thing and expect a different result. Take the California Public Employees’ Retirement System, the largest public pension fund in the United States, who has over $300 billion in assets. They are less than 70% funded (they don’t have enough money to pay all of their obligations in the future based on their current assets) and in 2016 the fund reduced their assumed rate of return from 7.5% to 7%. This new target is still higher than the 10-year annualized performance of 5.1% though.
Instead of lowering the assumed rate of return, which requires increased contributions from the current workforce, CalPERS and other pension funds should buy Bitcoin and other cryptoassets.
Seriously, a potential solution to the pension crisis is for them to buy Bitcoin. Here is why:
Bitcoin is a non-correlated asset — This is the holy grail of any portfolio. Bitcoin’s current 180 day correlation to the S&P 500 is 0 and the correlation to the dollar index is near zero as well. Investing in non-correlated assets should reduce the risk and increase the returns of a portfolio according to modern portfolio theory.
Bitcoin has an asymmetric return profile — There is much more upside than downside in owning the asset. The downside (loss of capital) is capped at the total amount of capital invested, yet the upside is ~100X+ (if Bitcoin only becomes gold equivalent).
The modern portfolio theory argument for investing in Bitcoin is quite strong. But how has theory played out in practice?
Bitcoin has been the best performing asset over the last 10 years. It has experienced a 1,300,000X+ increase in value from $0.003 to ~$4,000 today. It has beat the S&P 500 for the last 10 years, the last 5 years, and the last 2 years. As a fixed supply asset, I believe Bitcoin will continue to outperform traditional assets in the future as demand continues to increase too.
Although I have deep conviction in Bitcoin’s future outlook, pensions should not put significant funds at risk in this investment opportunity. It is risky and speculative. They could lose 100% of the money that they invest. For that reason, each fund needs to evaluate their current situation, their goals, and the amount of capital they would be willing to lose.
If the thesis plays out how I anticipate though, an investment of 100 basis points or less would materially change the performance of each pension fund, which ultimately changes the future viability of retiring for hundreds of millions of people. These institutions have permanent, long-term capital which allows them to stomach more volatility than most investors.
For example, an investment of 1% of assets at $4,000 BTC price would yield a 25% increase in the pension’s total assets if Bitcoin reached $100,000. If a fund decided to invest 0.1% of assets, the same price appreciation would increase total assets by 2.5%.
However, the exciting part is that many people believe Bitcoin will not only reach $100,000 one day, but rather be worth $1,000,000+. If that comes to fruition, a 0.1% investment today could lead to the same 25% increase in total assets for a pension fund. These types of trade-offs are the definition of an asymmetric return profile.
Most institutions have 0% exposure to Bitcoin and crypto however. This must change. They have to #GetOffZero.
As expected, this is not an easy decision for a pension fund. There are numerous factors involved, including (1) the investment team deciding they want to make the investment, (2) the investment team underwriting the risk and correctly sizing the position, (3) the investment committee understanding the pros/cons, and (4) the investment committee approving the investment. These people are intelligent and experienced investors, but many of them are not familiar with the asset (or worse, have a negative perspective based on reading headlines, etc).
It will take time for pension funds to get comfortable with investing in Bitcoin. We need to educate multiple stakeholders and demystify this nascent industry. When one makes the decision, it will create a cascading effect that leads to hundreds of them jumping in.
Bitcoin has the potential to save us from the current pension crisis. We just need one or two courageous individuals to make the first move.
-Pomp
The “Off The Chain” podcast has been downloaded 300,000+ times in 160 countries. You can listen to the latest episode with Ari Paul, CIO of Blocktower now: Click here for Off The Chain podcast
THE RUNDOWN
Launch of Bakkt Bitcoin Futures Market May Get Postponed Again: Intercontinental Exchange, the parent company of the New York Stock Exchange, is likely to delay the launch of Bakkt, its bitcoin futures trading and custody platform, a second time. The company last set as the launch date. However, ICE has yet to receive the necessary approvals from the U.S. Commodity Futures Trading Commission, and at the pace the agency has been moving, it is unlikely that approvals will be secured in time to hit that target. Read more.
Coinbase CEO Armstrong Pledges to Give Crypto Wealth to Charitable Causes: Coinbase CEO Brian Armstrong has joined other super-wealthy individuals in pledging to donate much of his net-worth to charitable or other causes. In a blog post on the website of The Giving Pledge – founded by Bill Gates and Warren Buffet to encourage the rich to donate their wealth to worthy causes – Armstrong said: “Once a certain level of wealth is reached, there is little additional utility from spending more on yourself.” Read more.
Report: Wall Street Is Getting Cold Feet on Bitcoin: Squeamish from the start about pursuing profits in one of the darker corners of finance, established firms this year slowed their already halting efforts to make a business out of Bitcoin mania. While none has thrown in the towel, and some continue to develop a trading infrastructure, most flinched as the value of virtual coins collapsed. Read more.
Crypto Firms Merge to Build Software for Institutional Investors: Two crypto firms are merging in a bid to make crypto-asset management easier for institutional players. CoinVantage, formerly a subsidiary of accounting firm MG Stover, is joining with Picks & Shovels, a provider of tools for crypto investors, to become a new entity known as Interchange. The new, eight-person company features software products that will initially service over 100 clients, including fund administrators, hedge funds and digital exchanges. Read more.
Ethereum Co-Founder Calls ‘the Crypto-bottom of 2018’: Joseph Lubin, co-founder of major cryptocurrency Ethereum (ETH), declared that he is “calling the crypto bottom of 2018” in a tweet Dec. 21. According to Lubin, the crypto market’s bottom “is marked by an epic amount of fear, uncertainty, and doubt,” specifically from industry media and social commentators, which he refers to as “our friends in the 4th and crypto-5th estates.” Read more.
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Nothing in this email is intended to serve as financial advice. Do your own research.
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