Life and annuity companies are increasingly spending a portion of their asset base on Bitcoin (BTCWhile the top crypto has delivered the best returns in the past decade, the long-discussed institutional herd seems to be finally making its way into the BTC market.
During the 2018 bear market, Bitcoin’s development efforts from multiple stakeholders seemed to be focused on improving BTC’s regulatory stance. These efforts have fueled the emergence of institutional custody platforms alongside other conditions necessary for greater participation of regulated entities.
Over the past year, publicly traded companies have started adding Bitcoin to their balance sheets, citing concerns about the decline in fiat currency. Significant cash inflows from major central banks in support of stimulus packages issued by governments to soften the economic blows of the coronavirus pandemic have scared market commentators of rising inflation.
With pension funds and insurance joining other government companies to invest in Bitcoin, attention is now shifting to whether governments themselves will invest in BTC through their sovereign wealth funds. Meanwhile, 2021 remains an optimistic year for the largest asset by market capitalization, with the outcome of March the best Q1 performance in eight years
Pension funds holding Bitcoin
As previously reported by Cointelegraph, KiwiSaver, a $ 350 million retirement plan managed by New Zealand Funds Management, recently 5% of its assets allocated to BitcoinAt the time, James Grigor, chief investment officer at NZ Funds, noted that Bitcoin’s similarities to gold make BTC an attractive asset for life and annuities companies.
According to Grigor, NZ Funds adjusted its bidding documents in 2020 to include cryptocurrency investments in the catalog. This move allowed the company to buy BTC in October when Bitcoin was trading around the $ 10,000 price.
In less than six months, NZ Funds’ KiwiSaver product is now likely to make nearly six times the profit on its Bitcoin investment. For the NZ Funds executive, Bitcoin offers another set of possibilities beyond the usual traditional asset route.
Indeed, Bitcoin’s well-established history of aggressive composition capabilities, despite a price recovery, seems to be catching the attention of big-money players. Hedge funds, family offices and listed companies have been allocating assets to Bitcoin in recent times.
In 2018 and 2019, Mark Yusko and Anthony Pompliano of Morgan Creek identified pension funds and insurance as a class of institutional investors who should consider investing in Bitcoin. At the time, Pompliano predicted that pension funds would face significant challenges in meeting their future obligations if they did not aggressively pursue portfolio diversification beyond the usual bond and equity investments.
In February 2019, Morgan Creek announced a blockchain-focused venture capital fund anchored by two public pension funds in the United States, among other investors. Since then, a few other pension funds and insurance companies have carried out some form of exposure to Bitcoin.
As reported by Cointelegraph at the time, Massachusetts-based insurance company MassMutual added Bitcoin to its general investment account. MassMutual has reportedly bought it $ 100 million in BTC of the New York Digital Investment Group, while also holding a $ 5 million equity stake in the company.
MassMutual’s Chelsea Haraty told Cointelegraph that the move was indicative of the company’s broader strategy to take advantage of emerging opportunities while diversifying its asset portfolio, adding:
“In addition, our investment in NYDIG and Bitcoin is in line with MassMutual’s overall commitment to innovation, giving us measured but meaningful exposure to a growing economic aspect of our increasingly digital world. Importantly, our $ 100 million investment in Bitcoin through NYDIG represents 0.05% – or less than one-tenth of 1% – of our total GIA. “
Haraty’s characterization of MassMutual’s Bitcoin spending as “measured but meaningful” echoes the sentiments of market advocates such as Yusko and Pompliano who have encouraged insurance companies and pension funds to invest in Bitcoin. Indeed, 1% is often used as one sufficient proportion for exposure to BTC for institutional investors.
Hedging of liabilities denominated in dollars
In January, Michael Sonnenshein, CEO of Grayscale crypto fund, took note pension funds fueled growth from the crypto asset manager. According to Sonnenshein, endowments and pensions were among the active investors in the company’s Bitcoin trust.
Robert Gutmann, CEO of NYDIG, has also reaffirmed that life and annuity companies are becoming more and more re-evaluating their investment allocation in view of some exposure to Bitcoin.
In a virtual podcast with Raoul Pal, an investment strategist and founder of Real Vision, Gutmann stated that several life and annuity companies were inquiring about investing in Bitcoin. According to Gutmann, the current pursuit of BTC exposure for pension funds and insurance companies went beyond fears of currency devaluation to concerns about the risks associated with having insufficient coverage for dollar-denominated liabilities, stating:
“Looking ahead to today’s world, it is reasonable to ask yourself as an investment committee or as an allocation committee [if] with all of it [their] dollar-denominated assets versus dollar-denominated liabilities is the right allocation mix. “
Pension funds are not exempt from the economic tensions caused by the ongoing coronavirus pandemic. In July 2020, Japan’s Government Pension Investment Fund – touted as the largest in the world – was recorded a loss in the first quarter of $ 165 billion, roughly the market cap of Bitcoin at that time. The loss was indicative of the market turmoil caused by the events of March 12, 2020, known as Black Thursday.
While COVID-19 is not as severe as the dents that pension funds took during the 2008 global financial crisis, it has negatively impacted the performance of many pension funds around the world. According to a report by Bloomberg in February, the Ontario Municipal Employees Retirement System, or OMERS – one of Canada’s largest retirement funds – recorded a 2.7% year-on-year decline in capital.
Poor investment choices during the ongoing COVID-19 pandemic are said to be the cause of Omers’ depreciation, with investments in markets such as legacy financial services, energy companies and other ‘old economy’ stocks failing to return. Even Warren Buffett, CEO of Berkshire Hathaway dumped bank stocks in favor of gold back in August 2020.
Amid the significant losses that pension funds suffered during the 2008 global financial crisis, there were calls for reforms in the private pension sector. Pension funds in countries under the umbrella of the Organization for Economic Co-operation and Development have indeed lost an estimate $ 3.5 trillion because of the crisis.
For OMERS and other pension funds that have suffered their greatest losses since the 2008 crisis, the foregone chance of not adding Bitcoin exposure is becoming clearer. To put Bitcoin’s dominance over traditional assets in perspective during the COVID-19 era, BTC is up more than 650% since the World Health Organization classified the coronavirus as a pandemic in March 2020.
State investment funds next in line?
Aside from pension funds and insurance companies, reports are emerging that sovereign wealth funds could become the next big participants in the institutional Bitcoin investment scene. According to NYDIG’s Gutmann, governments are also in talks with the company to allocate some of their assets to BTC.
While these talks are likely to have direct exposure, the Norwegian oil fund – the government pension fund – has an indirect Bitcoin investment. The largest state investment fund in the world, with more than $ 1 trillion in assets, has indirect BTC exposure through its investment in business intelligence company MicroStrategy.
During Gutmann’s podcast appearance with Pal, Real Vision’s founder also revealed that Temasek – Singapore’s sovereign wealth fund – is also a Bitcoin investor. According to Pal, Temasek, with an asset base worth about $ 306 billion, bought virgin BTC from miners.
Market commentators like Pal say that sovereign wealth funds will bring a “wall of money” into the Bitcoin space. Such an influx of institutional purchasing power could likely fuel another parabolic hike in the price of BTC. As with insurance, life and annuity companies, Bitcoin is likely to provide a suitable investment vehicle to be used as a hedge against dollar-denominated liabilities.