Are Pension Funds Considering Bitcoin allocations?

Bitcoin (BTC) is the world’s original and most highly valued of the cryptocurrencies, and one which continues to grow over time in adoption and value. Hitherto, holders of bitcoin have tended to be limited to private investors with some institutional adoption – notably companies such as Tesla, Square and Microstrategy have all reportedly bought bitcoin. Microstrategy, for example, has added tens of thousands of bitcoin to its corporate balance sheet since 2020, and continues to convert ongoing cashflow to bitcoin treasury reserves as part of its capital allocation strategy [1]. Some hedge funds and discretionary funds are also reported over time to have taken positions both long (buying) and short (selling) bitcoin.

It is impossible in a short blog post to provide a full treatise on bitcoin. However, proponents may point out that bitcoin is like a decentralised, encrypted, digital version of gold, albeit unlike gold that there is a programmed limited supply of bitcoin, which is “mined” via clusters of powerful dedicated computers solving puzzles of increasing difficulty– and that rate of new supply halves roughly every 4 years. Thus by the year 2140, all of the bitcoin that will ever exist will have been mined. This limited supply has arguably led to considerable positive price action as bitcoin adoption has picked up. Prices have been observable continuously since the protocol began operation in 2009, and a single bitcoin has moved from a few pennies in 2009 to $41,500 for 1 bitcoin at the point of writing (early December 2023). Bitcoin has also produced returns that have exhibited very low correlations with public market equities and bonds, so it may be regarded as an asset with high diversification potential in a portfolio context.

Detractors may point to a lack of a real world use case aside from as an unofficial “money”, no government or central bank backs bitcoin and there is no history to suggest that bitcoin is a bona fide asset class (unlike for example gold, which has thousands of years of history as an asset humans place value in). Also bitcoin has experienced periods of very high drawdown and volatility. Moreover, some investors have suffered losses due to inappropriate safeguarding of bitcoin held on certain exchanges and platforms (Mtgox and FTX being 2 infamous examples) [2].

Despite the tentative adoption of bitcoin amongst certain other institutions, pension funds in general have not made an allocation, possibly owing to a lack of understanding, training nor a desire to consider it further. Those that have given it proper consideration may consider the cons to be significant in relation to the pros, or there might have been no consideration made given a herding mentality byproduct of traditional investment consultant led advisory processes that typically influence asset allocation decisions.

In late 2023, the possibility of more widespread institutional adoption of bitcoin exists. Well-known asset management firms such as Fidelity, Blackrock and Franklin Templeton (amongst others) have reportedly applied for US Securities and Exchange Commission (SEC) approval for the launch of proposed Bitcoin Spot ETFs (Exchange Traded Funds). Although the SEC has appeared to be reluctant so far to approve one, market rumours suggest that the SEC will most likely approve the first of these ETFs sometime in early January 2024 [3]. One observation on what the ETF structure will bring is that investors so minded would be able to obtain exposure to bitcoin without needing to select their own exchange or custodian, the ETF would trade and custody (hold) the underlying assets, and the investors would be exposed to the price of bitcoin via their usual well-established fund and asset custody arrangements.

So the question we leave you with is, what if anything might the launch of these bitcoin ETFs do for institutional pension fund allocations to bitcoin from 2024 onward?

If you are a market participant and you have a view, we are keen to hear from you – please feel free to make a comment in response to this blog post.

Until next time!

[1] See for example https://www.microstrategy.com/en/investor-relations/press/microstrategy-acquires-additional-bitcoins-and-now-holds-over-105000-bitcoins-in-total_06-21-2021 [2] Plenty of examples of Bitcoin pro vs con discussions are available to read on the internet. For example https://www.msn.com/en-us/money/other/bitcoin-bull-vs-bear/ar-AA1fZ5Vm [3] https://www.forbes.com/sites/greatspeculations/2023/10/31/bitcoin-etfs-and-the-path-to-mainstream-adoption/?sh=7fd90a56dda7