The global nature of the cryptocurrency market means that decisions made by regulatory bodies and institutional investors in one country can have a significant impact on the price and adoption of Bitcoin worldwide. For example, when the United States Securities and Exchange Commission (SEC) makes a decision about exchange-traded funds (ETFs) in New York, it immediately affects the price of Bitcoin in Singapore.
Japan’s Government Pension Investment Fund (GPIF), the largest public pension plan with a $1.5 trillion investment portfolio, recently announced that it is exploring a new diversification strategy that may include Bitcoin. This announcement has reverberations not just in East Asia but all over the world, as Japan is an advanced and highly regulated economy that prioritizes the safety of workers’ retirement savings.
However, there are still obstacles to overcome before conservative institutional investors fully embrace Bitcoin. Its well-documented volatility raises concerns about its suitability for pension funds. Additionally, the impact of the GPIF’s announcement outside of Japan remains uncertain and may only become evident over time.
The launch of spot market Bitcoin ETFs in January generated a lot of excitement and apparent success. These ETFs were seen as a potential catalyst for institutional investors, including pension funds, to diversify their investment portfolios with Bitcoin. The question remains: Have these ETFs normalized crypto investment for institutional investors to the extent that pension funds will soon start using Bitcoin?
Market observers have different opinions on this developing trend. Lucas Kiely, chief investment officer at Yield App, believes that the GPIF’s consideration of Bitcoin is significant because of its status as one of the largest sovereign wealth funds in the world. On the other hand, Matthew Hougan, chief investment officer at Bitwise Asset Management, suggests that the GPIF’s statement is merely seeking basic information on various non-traditional investments, including Bitcoin.
Similar developments are happening in the United States, where a bill has been introduced in Arizona’s state legislature to encourage state retirement systems to explore investing in digital assets and Bitcoin ETFs. The increasing market capitalization of Bitcoin, its growing institutional adoption, and the potential for portfolio diversification and returns are factors that support this initiative.
South Korea’s National Pension Service also made headlines in November 2023 when it announced the purchase of over 280,000 shares of Coinbase, a Nasdaq-listed cryptocurrency exchange. Cyril Pipaud, chief product officer at Scrypt, a Swiss financial services firm specializing in crypto assets, acknowledges that the GPIF’s consideration of Bitcoin may seem surprising for a conservative investor like a pension fund. However, he points out that prestigious educational institutions like Harvard, Yale, Stanford, and MIT have already invested in crypto assets and Bitcoin, setting a precedent for pension funds.
Japan’s low-yield environment and the SEC’s approval of Bitcoin ETFs have also contributed to the growing acceptance of Bitcoin as an asset class among institutional investors. The increasing number of institutional-grade players providing custody and trading services has further boosted confidence in Bitcoin as an investment option for pension funds.
David Tawil, president and co-founder at ProChain Capital, believes that there is a growing recognition that Bitcoin has permanence as an asset class. He cites JPMorgan CEO Jamie Dimon’s acknowledgment of Bitcoin’s legitimacy as an example. In a world of governments in flux and broken sovereign balance sheets, Bitcoin is increasingly viewed as a safe haven.
Public pension funds globally, including those in the US, are underfunded, and they are looking for opportunities to maximize their investments. However, pension funds must exercise caution as they are responsible for people’s lifetime savings. They are more likely to invest indirectly in cryptocurrencies through alternative asset funds managed by established money managers who allocate a portion of their portfolios to crypto ETFs.
Despite the growing interest in Bitcoin among pension funds, there are still hindrances to overcome. Education and traditional mindsets for investing are the biggest obstacles, according to Brian Dixon, CEO of Off the Chain Capital. Fund managers may need to reframe their understanding of Bitcoin, considering its decentralized nature, to fully embrace it as a legitimate investment option.
Basile Maire, co-founder of D8X, an institutional-grade decentralized exchange, believes that pension funds will eventually add Bitcoin to their portfolios. Switzerland’s non-compulsory private pension plans serve as an example of the growing acceptance of Bitcoin among sovereign wealth funds, public pension funds, and corporate pension funds.
However, Matthew Hougan urges patience, stating that there are still factors that need to play out positively, such as the maturation of custody, liquidity, audit, and regulation. Widespread adoption by pensions and endowments is still years away, although there may be a few breakthroughs along the way.
Despite the challenges, the performance of Bitcoin over the past decade, with a compound annual return of approximately 75%, has generated interest among pension funds. Gabriella Kusz, adviser at TCS and former CEO for the Global Digital Asset Association, believes that this is just the beginning of a trend that will skyrocket in the coming months.