Life and annuity companies are increasingly dedicating part of their asset base to Bitcoin (BTC). While the top crypto has delivered the best returns over the past decade, the long-talked-about institutional herd seems to be finally making its way to the BTC market.
During the bear market of 2018, Bitcoin developmental efforts from multiple stakeholders seemed to focus on improving BTC’s regulatory stance. These efforts saw the emergence of institutional-grade custody platforms among other prerequisites needed for greater participation by regulated entities.
Over the last year, publicly listed firms have begun to add Bitcoin to their balance sheets, citing fiat currency debasement concerns. Significant cash influxes by major central banks to support stimulus packages enacted by governments to soften the economic blows struck by the coronavirus pandemic has market commentators fearful of rising inflation.
With pension funds and insurance joining other public corporations in investing in Bitcoin, attention is now shifting to whether governments themselves will begin to invest in BTC via their sovereign wealth funds. Meanwhile, 2021 remains a bullish year for the largest asset by market capitalization with its March closeout representing the best Q1 performance in eight years.
Retirement funds holding Bitcoin
As previously reported by Cointelegraph, KiwiSaver, a $350-million retirement plan operated by New Zealand Funds Management, recently allocated 5% of its assets into Bitcoin. At the time, James Grigor, chief investment officer at NZ Funds, remarked that Bitcoin’s similarities to gold make BTC an attractive asset for life and annuity firms.
According to Grigor, NZ Funds amended its offer documents back in 2020 to include cryptocurrency investments in its catalog. This move allowed the company to purchase BTC back in October when Bitcoin was trading around the $10,000 price mark.
In less than six months, NZ Funds’ KiwiSaver product is now likely sitting on almost six-fold profit on its Bitcoin investment. For the NZ Funds’ executive, Bitcoin presents another set of opportunities outside the usual traditional asset route.
Indeed, Bitcoin’s established history of aggressive compounding capabilities despite any price retracement seems to be catching the attention of big-money players. Hedge funds, family offices and publicly listed companies have been allocating assets to Bitcoin in recent times.
Back in 2018 and 2019, Morgan Creek’s Mark Yusko and Anthony Pompliano identified pension funds and insurance as a class of institutional investors that 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 investments in bonds and stocks.
In February 2019, Morgan Creek announced a blockchain-focused venture fund anchored by two public pension funds in the United States, among other investors. Since then, a few other pension funds and insurance firms have executed some form of exposure to Bitcoin.
As reported by Cointelegraph at the time, Massachusetts-based insurance provider MassMutual added Bitcoin to its general investment account. MassMutual reportedly bought $100 million worth of BTC from New York Digital Investment Group while also putting up a $5-million equity stake in the company.
Detailing the company’s Bitcoin investment thesis, MassMutual’s Chelsea Haraty told Cointelegraph that the move was indicative of the firm’s broader strategy of capitalizing on emerging opportunities while diversifying its asset portfolio, adding:
“In addition, our investment in NYDIG and Bitcoin aligns with MassMutual’s overall commitment to innovation, giving us measured yet meaningful exposure to a growing economic aspect of our increasingly digital world. Importantly, our $100-million investment in Bitcoin through NYDIG represents .05% — or less than one-tenth of 1% — of our total GIA.”
Haraty’s characterization of MassMutual’s Bitcoin outlay as “measured yet meaningful” echoes the sentiments espoused by market proponents like Yusko and Pompliano who have encouraged insurance firms and pension funds to invest in Bitcoin. Indeed, 1% is often used as an adequate proportion for BTC exposure for institutional investors.
Hedging dollar-denominated liabilities
Back in January, Michael Sonnenshein, CEO of Grayscale crypto fund, remarked that pension funds were fuelling the growth of the crypto asset management firm. According to Sonnenshein, endowments and pensions were among the active investors in the firm’s Bitcoin trust.
NYDIG CEO Robert Gutmann has also provided further confirmation that life and annuity companies are increasingly reevaluating their investment allocation with a view to engineering some exposure to Bitcoin.
In a virtual podcast with Raoul Pal, an investment strategist and founder of Real Vision, Gutmann declared that several life-and-annuity companies were making inquiries about investing in Bitcoin. According to Gutmann, the current drive for BTC exposure for pension funds and insurance firms went beyond fears of currency debasement to concerns over the risks associated with having insufficient cover for dollar-denominated liabilities, stating:
“If you look at the world today on a forward basis, it is reasonable to be asking yourself as an investment committee or as an allocation committee [if] having all of [their] assets denominated in dollars against dollar-denominated liabilities is the right allocation mix.”
Pension funds have not been exempted by the economic stresses occasioned by the ongoing coronavirus pandemic. In July 2020, Japan’s Government Pension Investment Fund — touted to be the largest in the world — posted a first-quarter loss of $165 billion, roughly Bitcoin’s market capitalization at the time. The loss was indicative of the market turmoil caused by the events of March 12, 2020, known as Black Thursday.
While not as heavy as the dents taken by pension funds during the global financial crisis of 2008, COVID-19 has negatively impacted the performance of many pension funds around the world. According to a report by Bloomberg back in February, the Ontario Municipal Employees Retirement System, or OMERS — one of Canada’s largest pension funds — recorded a 2.7% asset decline on a year-on-year basis.
Poor investment choices during the ongoing COVID-19 pandemic are reportedly to blame for Omers’ asset depreciation, with investments in markets such as legacy financial services, energy companies and other “old economy” equities failing to yield gains. Even Berkshire Hathaway CEO Warren Buffett dumped bank stocks in favor of gold back in August 2020.
Amid the substantial losses suffered by pension funds during the 2008 global financial crisis were calls for reforms in the private pension sector. Indeed, pension funds in countries under the Organization for Economic Co-operation and Development umbrella lost an estimated $3.5 trillion due to the crisis.
For OMERS and other pension funds suffering their largest losses since the 2008 crisis, the foregone opportunity of not adding any Bitcoin exposure is becoming more apparent. 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.
Sovereign wealth funds next in line?
Apart from pension funds and insurance firms, reports are emerging that sovereign wealth funds may become the next major participants in the institutional Bitcoin investment scene. According to NYDIG’s Gutmann, governments are also in talks with the company toward allocating some of their assets to BTC.
While having direct exposure is likely what these talks are about, Norway’s oil fund — the government’s pension fund — holds an indirect Bitcoin investment. The world’s largest sovereign wealth fund, with over $1 trillion in assets, has indirect BTC exposure via its investment in business intelligence firm MicroStrategy.
During Gutmann’s podcast appearance with Pal, the Real Vision founder also revealed that Temasek — Singapore’s sovereign wealth fund — is also a Bitcoin investor. According to Pal, Temasek, with an asset base valued at about $306 billion, has been buying virgin BTC from miners.
Market commentators like Pal say sovereign wealth funds will bring in a “wall of money” into the Bitcoin space. Such an influx of institutional buying power could likely fuel another parabolic advance in BTC’s price. As is the case with insurance companies and life and annuity firms, Bitcoin likely offers a suitable investment instrument to be used as a hedge against dollar-denominated liabilities.