See also: Unnamed scheme gets allocated to Bitcoin for the first time in the UK
In this article, Sam Roberts, Director of Investment Consulting at Cartwright, the scheme's advisor, explains why he believes Bitcoin has evolved from a niche digital asset to a mainstream investment opportunity…
Remember what they said about…
Facebook…? It will never take off…a temporary trend…no long-term growth. In fact, the company became one of the world's largest social media platforms, a multi-billion dollar company, and paved the way for social media as we know it. Online banking. It never works…can’t be trusted…lack of face-to-face. The reality is that online banking has become the norm, and millions of people in the workplace use it every day and instinctively. e-commerce. (Amazon, Ebay, etc.) Security concerns…Shipping concerns…Unable to physically inspect the product. In fact, online shopping has quickly become the preferred purchasing method around the world. cloud computing. It's not safe, it's not reliable. In fact, cloud computing has become the backbone of modern IT infrastructure. Streaming? People don't consume media this way. People are used to things like DVDS and CDs. The reality is that streaming has become the dominant way people access media.
But what does this have to do with pensions?
UK occupational pension trusts are currently in a very different situation. Perhaps 50% of defined benefit (DB) trusts are targeted for acquisition and will exit over the next few years. This is great news for both these members and sponsors.
Some companies may take more than five years to acquire, and some may wish to be run by a trust. These schemes require assets that have the potential to increase in value and require a willingness to accept some investment risk/volatility to achieve that growth.
Defined contribution (DC) trusts generally seek to address the problem of low member contributions, which inevitably leads to poor member outcomes. One solution is to target higher investment returns or invest in growth over the long term. Fortunately, with fewer annuities being purchased, many members' terms extend beyond retirement.
But what if there was an asset with long-term asymmetric growth potential, inflation resistance, good diversification against other investments, and, if held properly, near-zero counterparty risk? , was also fully consistent with existing regulations/legislation and the Pensions Regulator (TPR) guidance. What's more, it happens to be the most ESG-friendly asset available? So what? All you really need is a willingness to understand a new asset class and the time to do so.
One pension trust is already leading the way. What are its assets? Bitcoin.
Let’s see why that makes sense…
1. Potential for long-term asymmetric growth. The two main purposes of money are to move value over time (a store of value) and to move value across space (a medium of exchange). Government currencies are great at moving quickly around the world, but they lose a lot of value over time. Gold is great at retaining its value over time, but it's difficult and expensive to move over long distances. Bitcoin scores better on both factors due to its fixed supply of 21 million Bitcoins and its purely digital nature that allows final settlement to be achieved worldwide within seconds.
The corollary is that the best funds will eventually be used by everyone in the world, but it will take time for their benefits to become well known. Bitcoin therefore has the potential to become global money while absorbing some of its value from other assets (real estate, bonds, stocks, etc.) that are currently used as inefficient stores of value. It's hidden. Therefore, Bitcoin's potential market capitalization could exceed $200 trillion (£158 trillion), compared to Bitcoin's current market capitalization of $2 trillion. This suggests the potential for a significant increase in Bitcoin prices.
The process by which a new technology becomes widely accepted is unpredictable. Due to human emotions, journeys often have periods of hype and despair. In the case of Bitcoin, this hype and disappointment manifests itself in dramatic price movements. What matters to investors is the health of the underlying Bitcoin network, which continues to reliably confirm transactions approximately every 10 minutes.
Setting a small allocation (2%-4%) to this potential upside provides a long-term asymmetric opportunity.
2. Inflation resistance. Over 60 years ago, inflation meant an increase in the supply of something called money (pounds/dollars/gold). Since the 1970s, price inflation has more often referred to price increases, confusing cause and effect.
The only way to avoid inflation in the money supply is to buy useful assets that are difficult to produce additionally. Gold is a historically good example, but it still suffers from supply inflation due to new gold being mined every year. The real estate industry is doing well, but it is supported by a large amount of debt. Bitcoin offers a unique solution as the ultimate hard asset, as the final supply is fixed at 21 million Bitcoins.
3. Diversification. Diversification has long been used to spread risk across uncorrelated assets and stabilize overall portfolio performance. Bitcoin price movements have historically shown to have low correlation with traditional asset classes such as stocks, real estate, and bonds, making it an effective diversifier. Fragile economies with high levels of debt have significant counterparty risks, which affect the quality of equity, real estate, and bond markets. Therefore, being able to hold Bitcoin with almost zero counterparty risk is attractive from a diversification and risk management perspective.
In fact, Bitcoin allocation is a hedge against Bitcoin's success.
4. Counterparty risk is almost zero. In some ways, investing in Bitcoin is easy. A trustee buys it, holds it, and cuts its allocation when it gets too big. The only risk you should take is price fluctuations. This means that custody agreements must have near-zero counterparty risk and eliminate single points of failure. Until this issue was resolved during 2024, this was a key barrier to Bitcoin maturing into an institutional asset class.
5. Law and TPR. Bitcoin is securely implemented within a well-diversified portfolio and is fully consistent with legal and TPR guidance, including the importance of diversification, prudence and good governance.
Bitcoin is one of many asset classes for fiduciaries to consider, and it is not right for everyone. However, non-zero allocations should be considered for trusts/members with sufficient duration (more than 5 years).
Environmental and social impacts are important to many board members, sponsors, and members. What is still less well known is that Bitcoin supports these purposes more than any other asset, and sometimes achieves this in surprising ways.
6. Extra thoughts about DC. DC trusts may be more appealing to younger members, who tend to view Bitcoin as a legitimate investment option. Younger members also have longer time horizons, and financially involved members are probably already wondering why Bitcoin is not available. What we found is that when people learn about Bitcoin, they learn about money, which leads to higher savings rates and greater financial well-being. This is a difficult goal for many HR professionals at this time.
conclusion
Similar to the example given at the beginning of this article, it is clear that Bitcoin has become a controversial topic with a lot of negative backlash. Conversation is good. This is an opportunity for education and discussion. But what is less useful is uneducated discourse that is not based on too many things that are completely useless. Oddly enough, if it weren't for the many misconceptions about Bitcoin, we would already be on the path to mass adoption given its highly attractive investment properties.
Bitcoin has evolved from a niche digital asset to a mainstream investment opportunity, and ignoring it can be expensive. This represents a valuable opportunity for pension funds to diversify their portfolios and potentially achieve higher returns.
As the global financial landscape changes, UK pension schemes that do not take Bitcoin into account risk missing out on an asset that could shape the future of their investments. Now is the time for trustees and fund managers to seriously consider their role in ensuring the best outcomes for members, which is the ultimate focus of every investment decision.
Sam Roberts is Director of Investment Consulting at Cartwright Pension Trust.
