A pension fund is buying bitcoin. What a terrible idea

At the end of last month, a curious story caught my eye — one that, amid the cacophony of the US election, the budget and Rachel Reeves’s Mansion House speech, I suspect won’t have registered on many people’s radars.
Apparently, the first allocation to bitcoin was made by a UK defined-benefit pension scheme, with the unnamed fund putting “2 to 3 per cent” of its assets into the cryptocurrency on October 23. At the time of writing, the pension fund in question has already made about 10 per cent on that investment.
• Should pension funds be allowed to invest in cryptocurrency?
Its move into crypto comes almost exactly on the two-year anniversary of the collapse of FTX, the crypto exchange founded by Sam Bankman-Fried, who was sentenced to 25 years in prison for fraud. It also arrives barely half a year after Changpeng Zhao, the former chief executive of Binance, the largest crypto trading company, was sentenced to four months behind bars for breaking anti-money laundering laws.
Until I read the news, I would have said the odds of a UK pension fund committing a meaningful allocation to bitcoin were only marginally shorter than it investing in the musical back catalogue of the Vengaboys, the “Eurodance” group.
Before any “hodlers” (crypto speak for long-term holders of digital currencies) yell at me for being a “no-coiner” (crypto speak for unenlightened sceptics), let me clarify that I am not a crypto detractor. Actually, it’s my hunch that it could be one of the best-performing asset classes over the next few years.
There are a number of factors that could catapult crypto further into the mainstream — and into the portfolios of more traditional investors.
First is increased interest from institutions: a number of big investment houses have now launched crypto exchange-traded funds (ETFs) — financial products that allow an investor to track market moves without directly owning the underlying asset. But regulators also seem more open to digital currencies. While the US Department of Labor remains cautious on crypto as a retirement solution, a Securities and Exchange Commission ruling earlier this year opened the door for more “mainstream” bitcoin-linked products to begin featuring in investors’ 401(k) pension plans.
• SEC chief Gary Gensler to quit as bitcoin price hits $98,000
But the biggest boon for the asset class is undoubtedly the new resident of the White House come January 2025. When arguably the world’s most powerful man and his coterie of advisers — including the world’s richest man — constitute some of the biggest crypto champions around, it’s a sure sign that non-fiat currencies are no longer solely the preference of those who rail against the conventional financial system.
Investors of all shapes and sizes are piling in. The rally in the aftermath of Donald Trump’s election victory not only propelled bitcoin past $90,000, but also took the iShares Bitcoin Trust ETF beyond the size of its gold counterpart, raking in about $1 billion of inflows in the week after the result and $27 billion (£21.5 billion) overall since its launch in January, according to the data provider FactSet.
Renowned tech investor Cathie Wood has moved from being merely bullish to a stampeding rhino, predicting a base bitcoin price of $650,000 by 2030 with the possibility that it reaches up to $1.5 million.
However, just because I expect that crypto will perform well in the near term, this doesn’t mean I think it will, or should, become a pension fund staple. Individual investors who are looking for potentially outsized returns, and are prepared for a white-knuckle ride to get there, could well increasingly gravitate towards crypto. But when it comes to pension funds, it is worth reiterating their raison d’être.
Pension funds’ primary goal is to achieve enough stable growth to pay their beneficiaries a healthy amount in retirement. Their purpose is not to be a lottery where pensioners either get lucky and spend their retirement drinking Romanée-Conti Grand Cru on their superyachts, or get unlucky and find themselves unable to retire at all. In pension funds, highly volatile asset classes — whatever your convictions about their prospects or potential value — are inevitably square pegs in round holes.
It’s clearly not a bad thing that pension funds are trying to shake off their crusty, stuck-in-the-mud reputation and are thinking about new ways to diversify portfolios. Equally, the more political and regulatory backing it gains, the less taboo — and volatile — crypto should become. But full-scale credibility is still some way off. At the moment, its risk profile makes it more of a short-term gamble than a long-term investment.
The crypto-pioneering pension fund remains anonymous, indicating a bashful awareness that members might blanch at a chunk of their retirement pot being fired as a moonshot. As such, it’s likely to be an outlier rather than a trend-setter for the foreseeable future.
Seema Shah is chief global strategist at Principal Asset Management