The first UK pension fund has invested in Bitcoin according to the pension specialists Cartwright with the scheme reportedly allocating 3% of its assets to the cryptocurrency.
Laith Khalaf, head of investment analysis at AJ Bell, comments:
“It was only a matter of time before a UK pension scheme bought into Bitcoin, but this isn’t likely to spark a stampede into the asset class. Bitcoin is notoriously volatile, and pension scheme trustees are just as notoriously risk averse. Why wouldn’t you be when you’re looking after someone else’s retirement savings? The FCA says those investing in Bitcoin should only do so with money they are willing to lose in its entirety. That doesn’t sound like a tagline for something that fits comfortably into a pension scheme being run on behalf of members.
“It’s not entirely clear whether the scheme in question is a defined benefit or a defined contribution scheme. If, as seems likely, it’s the former, then the risk isn’t actually borne by members, but rather by the scheme itself, and then by the employer, should assets fail to cover liabilities. If it’s a default fund in a defined contribution scheme then returns directly impact the value of members’ pension pots. A 3% allocation might not sound like a lot, but it’s enough to make a sizeable impact on performance should Bitcoin head for the stars, or alternatively find itself on the digital scrap heap.
“Plenty of people have bought crypto on the off chance one day it might hit the mainstream as a currency. That seems a reasonable reason to invest with a small amount of speculative money. It’s harder to make a case for investing in Bitcoin in order to diversify a portfolio. It’s perfectly possible to achieve a high degree of diversification without going anywhere near Bitcoin, and that’s a tried and tested method practised by pension schemes and investors up and down the country. It’s brave to break new ground, but one does have to question how much extra diversification is really achieved by adding Bitcoin to a portfolio, and whether it’s worth the risk.
“While this may be the first pension scheme to invest in Bitcoin, it’s not the first cautious institutional investor to do so. The conservative investment firm Ruffer also bought a slice back in 2020, though sold out shortly after at a handsome profit as a result of what it called a ‘speculative frenzy.’ Four years after this apparent breakthrough for the cryptocurrency, there hasn’t been a groundswell of similar multi-asset funds buying Bitcoin.
“Part of the issue with institutional investors buying Bitcoin, even if they wanted to, is the dearth of vehicles allowing them to do so. It’s not possible for them to securely set up a trading account on Binance, Coinbase or the like and deposit tens of millions of pounds of someone else’s money in there. The launch of Bitcoin ETFs in the US is a gamechanger in this regard as they offer big investors a regulated means of gaining exposure to the cryptocurrency, but the FCA has understandably been much more reluctant to permit mass market vehicles for crypto investment, given the potential for consumer harm.
“While the price of Bitcoin is currently riding high, in the past we’ve seen strong performance quickly giving way to dramatic price falls. That in itself is a big hindrance to Bitcoin being adopted by consumers and businesses as a means of exchange. If you think Bitcoin is the future of currency despite its volatility, ask yourself if you’d be willing to be paid by your employer or billed by your mortgage provider in the cryptocurrency. Central banks are also considering launching their own digital currencies, which could well undermine the use case for Bitcoin expect for among die-hards who want to stick it to the man.
“It’s possible Bitcoin will thrive and prove its doubters wrong, but it’s also possible it will ultimately become worthless. The extreme price outcomes from these two possibilities partly explains why Bitcoin is so volatile, as investors lurch from one pole to the other. Anyone buying Bitcoin as a small punt on the future turning into a crypto utopia just needs to make sure they’re happy to assume the considerable risks. Meanwhile anyone thinking they need to buy Bitcoin to diversify their portfolio should think again.”
