UK Pension Fund First to Directly Invest in Bitcoin
Institutional Investment in Crypto: A Growing Trend
For years, the conversation around cryptocurrency has been centered on the “institutional rush” — a surge in institutional capital flowing into the crypto market. However, these institutional investors are far from homogeneous.
In broad terms, institutional capital comes from a diverse set of players, including banks, insurance companies, sovereign wealth funds (SWFs), endowment funds, family offices, and pension funds. Family offices, such as those of Arthur Hayes, and university endowment funds, like Yale’s, have long been pioneers in the crypto asset space.
Now, pension funds — traditionally conservative investors — are joining the ranks of institutional players venturing into crypto assets.
The UK’s First Pension Fund Direct Bitcoin Investment
In a groundbreaking move, a pension fund in the UK has made its first-ever direct investment into Bitcoin. Assisted by consulting firm Cartwright, the fund allocated 3% of its assets into Bitcoin, bypassing indirect vehicles like ETFs. This marks a historic milestone, as it is the first instance of a UK pension fund directly holding Bitcoin.
This decision followed in-depth discussions with fund trustees, taking into account factors like Environmental, Social, and Governance (ESG) considerations, as well as security concerns. To ensure the safety of the holdings, the private keys for the Bitcoin are managed collaboratively by five independent institutions.
Cartwright also plans to introduce a Bitcoin employee benefits scheme, allowing businesses to pay employees directly in Bitcoin. Several companies have already shown interest in the initiative.
Cartwright, which has 51 to 200 employees and is based in Hampshire, UK, is paving the way for pension funds to adopt cryptocurrency as part of their investment strategy.
Understanding Pension Funds
Pension funds are long-term investment vehicles that manage retirement savings and benefits. They typically consist of government pension schemes, corporate pension plans, and individual retirement accounts (IRAs). Pension funds have large-scale assets and are generally viewed as stable, long-term investors due to their focus on providing consistent returns for retirees.
The pension systems in countries like the U.S. are built on three main pillars: public pensions, corporate pensions, and individual pensions. As of the end of 2023, the total pension assets in the U.S. were approximately $37.9 trillion, with public pensions accounting for 6.2%, corporate pensions at 58%, and individual pensions at 35.8%. These funds are traditionally invested in government bonds, stocks, mutual funds, and other stable assets to ensure long-term growth.
While pension funds have historically been cautious in adopting high-risk investments like cryptocurrencies, recent trends suggest that they are starting to take a more active interest in the digital asset space. Typically, pension funds are slower to invest in cryptocurrencies compared to family offices and endowment funds, but their increasing involvement signals a shift in institutional investment attitudes.
Pension Funds Entering Crypto: A Growing Trend
The recent move by a UK pension fund to invest directly in Bitcoin is not an isolated incident. Pension funds across the world are becoming more involved in the crypto space. For example, the Michigan Retirement System in the U.S. made waves earlier this month by revealing its purchase of shares in the Grayscale Ethereum Trust (ETH), making it the first pension fund to hold an Ethereum spot ETF since its launch in July. Additionally, Michigan’s pension fund also invested $6.6 million into a Bitcoin ETF in July.
In New Jersey, Mayor Steven Fulop announced that the city’s pension fund would allocate part of its assets into Bitcoin ETFs, reflecting a growing acceptance of crypto investments among public pension plans. Florida’s Chief Financial Officer, Jimmy Patronis, also advocated for using Bitcoin to diversify the state’s pension funds, underscoring the increasing institutional interest in crypto as a legitimate asset class.
In 2021, the Houston Pension Fund, which manages over $4 billion in assets, made a significant purchase of $25 million worth of Bitcoin and Ethereum. This was one of the most notable moves by a pension fund into the crypto market at the time.
Indirect Crypto Investments by Pension Funds
Not all pension funds are diving directly into Bitcoin or Ethereum ETFs. Some prefer to take a more indirect approach. For example, in August 2023, the National Pension Service of South Korea bought 245,000 shares of MicroStrategy, a company that holds a large amount of Bitcoin on its balance sheet. The same fund also sold tens of thousands of Coinbase shares earlier in the year, showing a more cautious approach to direct crypto exposure.
Moreover, some pension funds have also provided financing to crypto brokers and other related entities. For instance, Lockheed Martin invested in the crypto brokerage Hidden Road. Additionally, some pension funds are getting involved in crypto through venture capital investments, supporting blockchain and crypto startups that may eventually become a part of their broader investment strategy.
Lessons from the Past: Caution After Losses
Pension funds have not been immune to the risks inherent in crypto investments. During the previous market cycle, some pension funds, such as Canada’s CDPQ, suffered significant losses due to events like the collapse of Celsius and FTX. These losses led many pension funds to adopt a more cautious approach, waiting for more regulatory clarity and stability in the crypto market before making further investments.
However, with the approval of Bitcoin spot ETFs and the increasing recognition of Bitcoin as a form of digital gold, it is likely that more pension funds will begin to incorporate Bitcoin and other crypto assets into their investment portfolios. The growing market maturity, combined with the security measures available for crypto custody, is helping to build trust among institutional investors.
Conclusion: The Future of Crypto in Pension Funds
As Bitcoin and other cryptocurrencies become more recognized as legitimate assets, pension funds will likely continue to explore opportunities in the digital asset space. The move by a UK pension fund to directly invest in Bitcoin is a significant milestone in the evolution of institutional crypto adoption, and it is expected that other pension funds will follow suit as they become more comfortable with the market’s potential.
While some pension funds will take a conservative approach, carefully managing risk and diversifying their holdings, others will take a more aggressive stance, using crypto assets as a hedge against inflation or a tool for long-term growth.
Regardless of the strategy, the inclusion of cryptocurrencies like Bitcoin in pension portfolios represents an exciting new chapter for institutional investment in the digital asset space. As the market continues to mature, more pension funds will likely recognize the potential of cryptocurrencies as part of a diversified investment portfolio.