Cryptocurrency: The Future of Pension Funds?

In a break from usual conservative investment patterns, pension funds are now considering cryptocurrency as an asset class. Interest in digital assets is growing among institutional investors––with the crypto market maturing in the previous two years, it would seem that interest is at a peak. 

Bitcoin continues to be the digital asset of choice, for several reasons. For one, Bitcoin is a deflationary asset; it has an inelastic supply curve, giving investors the “functionality and safety of investing in gold, [but also] an asset that guards and fights against inflation,” according to Paul Capelli, portfolio manager for Galaxy Digital Asset Management. It’s also cheap to move and store. In a 2020 survey by Fidelity, nearly 80% of institutional investors said they find something appealing about digital assets, with the three almost equally compelling characteristics being that it is uncorrelated to other asset classes; is an innovative technology play; and has a high potential for upside.

Along with other cryptocurrencies, Bitcoin is bought, stored, and traded on Blockchain. Blockchain may address pension systems’ usual lack of transparency by working on a shared, decentralized ledger––thus allowing individuals to audit the pension funds that they’re considering. Blockchain also encourages greater accountability, with reporting mechanisms that can punish funds that don’t follow through by inscribing results on the shared ledger.

There are already a few major examples of pension funds dabbling in crypto. In 2019, Hong Kong-based firm Legacy Trust launched the first digital asset-backed pension plan, whose portfolio includes cryptocurrencies and traditional investments. Also in 2019, two public pension funds from Fairfax County, Virginia, announced that they were backing Morgan Creek’s $40 million Blockchain Venture Capital Fund.

With crypto’s increasing appeal as an asset class and its ability to address pension fund weaknesses, it is likely that more funds will be following into the crypto sector soon.