To investors,
It was confirmed yesterday that the Houston Firefighters Pension Fund has officially become the first pension fund in the United States to purchase, and directly hold, bitcoin in their portfolio.
As many of you will remember, two public pension funds from Fairfax County in Virginia previously invested in the first two Morgan Creek Digital funds. They were the first public pension funds to allocate to the industry. These were venture funds that had approximately 15-20% invested in bitcoin.
After Fairfax, there was only one other pension fund that I’m aware of that had invested in the industry - the Municipal Employees’ Retirement System of Michigan allocated to Dan Tapiero’s 10T Holdings growth equity fund.
Each of these three public pension funds were investing in venture capital style funds, even if they had some bitcoin exposure, simply because there was no clear framework for them to safely place the digital assets directly in their portfolio. Does bitcoin go in their currency allocation? Maybe commodities? Or maybe it is digital real estate? There has been no clear answer. So venture funds made sense because everyone understood that the allocation went in the venture capital bucket.
This is all changing though. Bitcoin and cryptocurrencies are maturing to the point where public pension funds, along with financial institutions and corporations, are all comfortable holding the assets directly. They understand which bucket in their asset allocation to put them into. And the infrastructure is now available where institutions don’t have to worry about custody, insurance, or accounting support.
The market has matured significantly since 2018. Even with all this progress though, it is still a big moment when the very first public pension puts bitcoin on their balance sheet. Eventually every pension fund is going to do it. I’ve been saying this for years.
In this letter from December 24, 2018:
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.
I then went on to explain why bitcoin was a potential solution:
“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.”
The argument has always been simple. Bitcoin is a non-correlated, asymmetric asset that would allow a pension fund to make a small allocation, while still having an outsized impact on the portfolio. This was true when bitcoin was around $3,500 and it is true when bitcoin is trading around $65,000 today.
We still have a long way to go in educating public pension investment teams, their investment committee board members, and the general public who is made up of pensioneers. But we’re making great progress towards the inevitable end. Pension funds are not going to be able to fulfill their obligations, so they have to do something different.
I like our chances. The Houston Firefighters Pension Fund should get immense congratulations for their courage and conviction in this decision. Hope each of you has a great day and I’ll talk to everyone on Monday.
-Pomp
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THE RUNDOWN:
Peter Thiel Tells Crowd Where He’d Look for Elusive Bitcoin Founder Satoshi: Peter Thiel told a crowd of a few hundred people assembled at a Miami conference where he’d look for clues about the real identity of Satoshi Nakamoto, the now almost mythical pseudonymous founder of Bitcoin -- a beach in the Caribbean. “My sort of theory on Satoshi’s identity was that Satoshi was on that beach in Anguilla,” the technology billionaire and self-described libertarian said Wednesday, recounting an early meeting with the founders of E-Gold Ltd., a now defunct digital currency that was indicted by the U.S. Justice Department in 2007. “I met them on the beach in Anguilla in February of 2000. We were beginning the revolution against the central banks on the beach in Anguilla. We were going to make PayPal interoperable with E-Gold and blow up all the central banks.” Read more.
Bitcoin’s Inflation Narrative More Compelling Than ETF Fever, JPM Says: This week’s launch of the ProShares Bitcoin Strategy Exchange-Traded Fund may have aided the cryptocurrency’s recent price surge to an all-time high, though the perception of bitcoin as an inflation hedge over gold is probably a bigger factor, a JPMorgan strategist wrote Thursday. In its first two days of trading, BITO amassed assets of over $1 billion, according to ProShares. Read more.
Robinhood’s Waitlist for Crypto Wallet Has More Than 1M Customers: The waitlist for Robinhood’s crypto wallet is now more than one million customers long, Robinhood CEO Vlad Tenev said at CNBC’s Disruptor 50 summit on Thursday. Robinhood announced last month it was planning to roll out a crypto wallet in early 2022 that would allow customers to trade, send and receive cryptocurrencies, as well as transfer them to hardware wallets. Read more.
Walmart Has Quietly Begun Hosting Bitcoin ATMs: Walmart, the world’s largest company by revenue, is letting customers buy bitcoin at dozens of its U.S. stores. Shoppers can purchase the cryptocurrency at Coinstar machines inside the retailer’s cavernous big box stores. A CoinDesk editor verified that the service works, buying a small amount of BTC at a Pennsylvania Walmart on Oct. 12. Read more.
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