Could Bitcoin Save Pension Funds?

Asset management firm Morgan Creek Digital recently received what is believed to be the first cryptocurrency investment from a U.S. pension fund. The company recently announced a new $40 million venture capital fund anchored by two major pension plans.

The two anchor investors are the Fairfax County Police Officer’s Retirement System and the Fairfax County Employee’s Pension plan of Fairfax County, Virginia. The two funds manage $5.1 billion in assets combined. Other investors in the fund include a university endowment, an insurance company and a private foundation.

It is structured like a traditional venture capital fund, according to one of the founders of Morgan Creek Digital. It will invest in the equity of firms in the blockchain and digital assets sector and will hold a small portion of its value in liquid cryptocurrencies.

The fund has already invested part of the $40 million in startups, including Bakkt, a cryptocurrency exchange that’s co-owned by Starbucks, the Intercontinental Exchange, which operates the New York Stock Exchange and cryptocurrency company Coinbase.

The Looming Pension Crisis

Pensions plans around the world are in crisis and have been described as a time bomb. Many pension plans are underfunded and have a multitude of other problems, as well including limited transparency, insufficient security and conflicts of interest.

According to a recent study by the World Economic Forum, there will be a $224 trillion funding gap across the world’s six biggest pension systems by 2050.

The gap is most substantial in the United States. These massive looming problems have caused many to turn to alternatives to traditional pension systems. One alternative is the Employee Share Ownership Plan, in which a company’s workers receive an ownership interest in the company. Others are relying on property investments or individual savings accounts.

Investing in cryptocurrencies is another increasingly popular alternative. More people may have the ability to invest in cryptocurrency-based pension plans, as other asset management firms follow in the footsteps of Morgan Creek Digital.

Could Bitcoin Diffuse the Pension Time Bomb?

Pompliano believes bitcoin could help solve the pension crisis. He wrote in a December 2018 blog post that every pension fund should purchase bitcoin and other cryptocurrency assets. He provided two main reasons for this — bitcoin is a noncorrelated asset, and it has an asymmetric return profile.

Bitcoin is not correlated to the stock market, the dollar or any other traditional financial measure. Because of this lack of correlation, investing in bitcoin reduces risks and increase returns, he writes. He also argues that there is more of an upside than a downside to owning bitcoin. You can only lose as much as you invested, while the potential earnings are unlimited.

This potential for outsized returns has been a significant attractor for crypto investors. Modern Creek Digital has also said it believes all traditional assets will eventually come to be represented by digital tokens.

Using blockchain, the digital ledger used for cryptocurrencies, for pension infrastructure could increase transparency because of the immutable nature of blockchain records. A startup called Akropolis has created such as blockchain-based pensions infrastructure.

While the volatility of cryptocurrencies has attracted some investors, it has kept crypto from going mainstream. Investing in cryptocurrency is risky since the market is so volatile. However, large influxes of funding, such as the recent $40 million Morgan Creek Digital fund, could help stabilize the market.

Thanks in part to these types of investments, cryptocurrencies are starting to gain more widespread acceptance. Cambridge Associates, a pensions and endowments consultant, recently advised institutional investors to start considering digital currencies.

Cambridge noted that while it does come with substantial risk, crypto could revolutionize the digital world and investing in it may be a smart long-term strategy.

It’s no secret that the pension system is in crisis. While there are still many doubters, the financial industry is starting to consider bitcoin and other cryptocurrencies as a potential solution.

Image by David McBee