Tesla’s announcement in a SEC filing on Monday 8 February 2021 that it had bought $1.5 billion worth of Bitcoin – described by some as digital gold – was quickly followed by cryptocurrency-friendly announcements from more traditional corporations including Mastercard and BNY Mellon, American’s oldest bank. The big question now is: will another large corporation directly invest? Given the additional shift towards more institutional interest perhaps a more poignant question should be asked: will we see pension funds increasingly invest in this sector?
Of course, Tesla wasn’t the first corporation to announce that it had directly invested in Bitcoin. The digital gold medal for doing so publicly has to be given to Microstrategy, which on 11 August 2020 completed an initial purchase of $250 million worth of Bitcoin, at the time 21,454 Bitcoin, and as of 21 December 2020 holds an aggregate of 70,470 Bitcoin. The silver prize goes to Square, whose CEO is Jack Dorsey of Twitter, which on 8 October 2020 announced a $50 million Bitcoin purchase.
Microstrategy, Square and Tesla are all arguably forward-thinking and progressive tech companies. But as cryptocurrencies and the underlying blockchain technology has become more ubiquitous it has perhaps not been a complete surprise to see more traditional institutions joining the band wagon.
A case for institutional investment in Bitcoin was made early, in fact as far back as 2017 by Jim Kyung-Soo Liew, a finance professor at Johns Hopkins’ Carey Business School and chief executive officer of SoKat Consulting, and Levar Hewlett, a quantitative risk management associate at the Maryland State Retirement and Pension System.
More recently, a February 2019 Forbes article noted that “If a flood of pension fund money is going to come into crypto, it will have to be released by the fund consultants. These consultants hold the key to the castle as many funds rely heavily on their recommendation for asset classes”.
On the same day as Tesla’s announcement, it was observed by some outlets that investment consultants, those gatekeepers of pension schemes, are increasingly more interested in Bitcoin. In fact, Redington has been conducting research into asset managers that have begun to allocate money to Bitcoin.
So what are the barriers for pension funds investing in Bitcoin? Primarily, it would appear to be the volatility. Bitcoin has more than quadrupled in price since a crash in March 2020. Indeed, this is not unique to pension funds, commenting on Tesla, a recent FT article observed there would not be many corporate copycats, citing the “massive volatility”. But Tesla’s stock market filing asserted it had updated its investment policy to allow for “returns on our cash that is not required to maintain adequate operating liquidity”. An interesting side effect of corporations’ direct investment is that pension funds with exposure to their shares will now have indirect exposure to Bitcoin, and the accompanying volatility.
Let us not dismiss a potential domino effect. Although of course correlation is not causation, as more corporations have obtained direct exposure the price has increased. Will a pension fund take the plunge in the expectation that others will then follow suit?
Certainly a new generation of technology-savvy investors will be more accustomed to the asset class and the underlying technology. They will no doubt expect, and even demand, this exposure in their pension funds. If there’s a chance that this asset will become more institutionally accepted then they would be right to.
Looking back to indirect investment it was reported that Grayscale’s newly appointed CEO Michael Sonnenshein, told Bloomberg that pension funds and endowments are investing actively into the Grayscale family of funds. Could this be the push needed for a pension fund directly buying Bitcoin?
As things currently stand the answer is likely a no. Evidence of any direct investment by a pension fund is hard to find. Given the newness of this asset class the likelihood is that for the moment it is almost certain to remain this way.
What can be said with some certainty though is that a few years ago it was unimaginable that such large corporations would affiliate themselves as they are now seeming to be doing. It will certainly be interesting to watch how pension funds react to this market over the next few months and years.