Life leasing and annuity companies are increasingly betting a portion of their assets on bitcoin (BTC). With the leading cryptocurrency recording its best performance in a decade, the long-discussed institutional herd seems to have finally found its place in the BTC market.
During the 2018 bear market, the efforts of various bitcoin development players seem to have been focused on improving the regulatory situation of BTC. As part of these efforts, institutional holding platforms have emerged, as well as other conditions for broader participation by regulated actors.
Over the past year, publicly traded companies have begun to include bitcoin on their balance sheets due to concerns about the currency’s devaluation. Significant inflows of funds from major central banks to support government stimulus measures to cushion the economic impact of the coronavirus pandemic have prompted market commentators to warn of rising inflation.
With pension funds and insurance companies joining other public companies investing in bitcoin, attention is turning to whether governments themselves will invest in bitcoin through their sovereign wealth funds. Meanwhile, 2021 remains a bullish year for the largest asset by market capitalization, and its March close was its best performance in eight years.
Pension funds holding bitcoins
As previously reported by Cointelegraph, KiwiSaver, a New Zealand fund management company, recently invested 5% of its assets in bitcoin as part of a $350 million pension plan. At the time, James Grigor, head of investments at NZ Funds, noted that bitcoin’s similarity to gold made BTC an attractive asset for life insurance and annuities.
According to Grigor, NZ funds changed their offering documents in 2020 to include investments in cryptocurrencies in their catalogue. This move allowed the company to buy BTC in October, when bitcoin was quoted around $10,000.
NZ Funds’ KiwiSaver product is expected to deliver nearly six times the return of bitcoin in less than six months. For the New Zealand fund manager, bitcoin represents another set of opportunities outside the usual traditional investment path.
Indeed, bitcoin’s proven track record of aggressive combinations, despite a drop in price, seems to be attracting the attention of high-money players. Hedge funds, family offices and public companies have recently invested assets in bitcoin.
In 2018 and 2019, Morgan Creek’s Mark Yusko and Anthony Pompliano identified pension funds and insurance companies as a class of institutional investors that should consider investing in bitcoin. At the time, Mr Pompliano predicted that pension funds would find it very difficult to meet their future liabilities if they did not actively seek to diversify their portfolios beyond traditional investments in bonds and shares.
In February 2019, Morgan Creek announced a blockchain-focused venture capital fund launched by two U.S. public pension funds, among other investors. Since then, several other pension funds and insurance companies have taken stakes in bitcoin.
As Cointelegraph reported at the time, Massachusetts-based insurance company MassMutual has added bitcoin to its general investment account. MassMutual reportedly bought $100 million worth of BTC from New York-based Digital Investment Group, while offering $5 million worth of the company’s shares for sale.
MassMutual’s Chelsea Haraty explained Bitcoin’s investment thesis to Cointelegraph, adding that the move is a sign of the firm’s broader capitalization strategy through emerging opportunities while diversifying its asset portfolio :
In addition, our investments in NYDIG and Bitcoin are consistent with MassMutual’s overall commitment to innovation and give us a measurable yet meaningful impact on the growing economy of our increasingly digital world. It is important to note that our $100 million investment in bitcoin through NYDIG represents 0.05% – less than one-tenth of 1% – of our total GIA.
Harati calls MassMutual’s assessment of bitcoin’s value measured but significant, echoing the views of market advocates like Yusco and Pompliano, who have encouraged insurance companies and pension funds to invest in bitcoin. In fact, 1% is often used by institutional investors as an appropriate percentage for exposure to BTC.
US dollar hedging liabilities
In January, Michael Sonnenshine, CEO of cryptocurrency fund Grayscale, pointed out that pension funds were helping cryptocurrency asset managers grow. According to Sonnenschein, endowments and pension funds are among the active investors in bitcoin funds.
NYDIG CEO Robert Gutman confirmed that life insurance and annuity companies are increasingly overpricing their investments to make some impact on bitcoin.
In a virtual podcast with Raul Pal, an investment strategist and founder of Real Vision, Gutman said many life and business companies are asking questions about investing in bitcoin. According to Gutmann, the current increase in BTC-related risks for pension funds and insurance companies goes beyond concerns about currency devaluation, as well as concerns about risks related to insufficient hedging of US dollar-denominated liabilities, the report said :
If you look at the world today, it’s reasonable for an investment committee or distribution committee to wonder if it’s the right allocation mix to have all your assets denominated in U.S. dollars while your liabilities are denominated in U.S. dollars.
Pension funds have not been spared the economic burden of the ongoing coronavirus pandemic. July 2020. The Japanese government’s pension investment fund, which has become the world’s largest, suffered a $165 billion loss in the first quarter, which is roughly Bitcoin’s market capitalization at the time. This loss reflects the market turbulence caused by the event known as Black Thursday on the 12th. Mars 2020.
Although not as severe as the crisis that hit pension funds during the 2008 global financial crisis, the COVID-19 crisis has taken a heavy toll on many pension funds around the world. According to a February Bloomberg report, the Ontario Municipal Employees’ Retirement System (OMERS) – one of Canada’s largest pension funds – saw its assets fall 2.7% from last February.
Poor investment decisions during the current COWID-19 pandemic are believed to be the cause of Omers’ asset losses, and investments in markets such as traditional financial services, energy companies, and other old economy stocks have not performed. Even Warren Buffett, CEO of Berkshire Hathaway, dumped the bank’s shares in favor of gold in August 2020.
In the context of the significant losses suffered by pension funds during the 2008 global financial crisis, there have been calls for reform of the private pension sector. In fact, the pension funds of the member countries of the Organisation for Economic Co-operation and Development lost about $3.5 trillion as a result of the crisis.
For OMERS and other pension funds, which have suffered the biggest losses since the 2008 crisis, the missed opportunity of not adding bitcoin is becoming increasingly clear. To demonstrate bitcoin’s dominance over traditional assets in the COVID-19 era, BTC has risen more than 650% since the World Health Organization classified the coronavirus as a pandemic in March 2020.
Are sovereign wealth funds next in line?
In addition to pension funds and insurance companies, some reports indicate that sovereign wealth funds could become the next big players on the institutional bitcoin investment scene. NYDIG’s Gutman said governments are also in talks with the company to divest some of its BTC assets.
We’re probably talking about the direct impact here, but the Norwegian Petroleum Fund, a government pension fund, has an indirect investment in bitcoin. The world’s largest sovereign wealth fund, with more than $1 trillion in assets, is exposing BTC indirectly by investing in business intelligence company MicroStrategy.
In Gutman’s podcast with Pal, the Real Vision founder also revealed that Temasek, Singapore’s sovereign wealth fund, is also a bitcoin investor. According to Pal, Temasek, which has about $306 billion in assets, bought virgin BTC from miners.
According to market commentators Pal, sovereign wealth funds will bring a wall of money to the bitcoin space. This influx of institutional purchasing power is likely to drive a further parabolic rise in the price of BTC. Like life insurance and annuities, bitcoin is likely to be a suitable investment vehicle to hedge against US dollar denominated liabilities.
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