Is Bitcoin Right for Your Pension Plan?

Digital assets are gaining in favorability and appeal among institutional investors, a Fidelity Investments survey finds.

In a comprehensive survey of almost 800 institutional investors across the United States and Europe, 36% of respondents say they are currently invested in digital assets, and six out of 10 believe digital assets have a place in their investment portfolio. Bitcoin continues to be the digital asset of choice with more than one-quarter of respondents holding Bitcoin; 11% have exposure to Ethereum.

Ethereum is a decentralized, open-source blockchain featuring smart contract functionality. Ether is the native cryptocurrency of the platform. It is the second largest cryptocurrency by market capitalization, after Bitcoin.

“These results confirm a trend we are seeing in the market toward greater interest in and acceptance of digital assets as a new investable asset class. This is evident in the evolving composition of our client pipeline, which spans from crypto native funds to pensions,” said Tom Jessop, president of Fidelity Digital Assets, in a press release.

Paul Cappelli has been a portfolio manager for Galaxy Digital Asset Management since the company was launched 3 1/2 years ago. The company, started by a former Goldman Sachs partner, is a digital asset investment merchant bank with multiple business lines, including asset management.

“We do have assets from clients at every level of investor,” Cappelli says. “We’ve seen incredible amount of flows into Bitcoin and digital asset funds. We expect we will continue to see more institutional level investors drive money into the space.”

Cappelli explains that Bitcoin serves the purpose of digital gold, but it is different from gold in that it has an inelastic supply curve (an inelastic demand or supply curve is one in which a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied). He says it’s also a deflationary asset, it’s cheap to move and to store and it has been an uncorrelated asset over the past 10 years. “Investors get the functionality and safety of investing in gold, but they also get an asset that guards and fights against inflation,” Cappelli says.

Cappelli says Bitcoin is thought to be the future of money. “It brings us from an analog or local society to a digital and global society,” he says. “It’s a flight to quality asset that offers a different functionality—guarding against inflation and being uncorrelated, not just producing yield.”

In the Fidelity survey, nearly 80% of institutional investors said they find something appealing about digital assets, with the three almost equally compelling characteristics across U.S. and European investors being that it: is uncorrelated to other asset classes (36%), is an innovative technology play (34%) and has a high potential for upside (33%).

A Deflationary Asset

Cappelli says investors rarely have the opportunity to buy growth from an asset that is also deflationary, which is one appeal of Bitcoin. “It will take decades or a lifetime for U.S. currency to rebound from this year’s stimulus,” he notes.

And Bitcoin will continue to be deflationary over time. Cappelli explains that every four years, fewer bitcoins will be issued per block. “Bitcoin’s supply curve and production curve are known; it’s been coded. Bitcoin is a hard asset due to limited supply,” he says. He also notes that there’s not a threat that Bitcoin will become illiquid and investors will not be able to trade.

Concerns About Volatility

However, Bitcoin is a very volatile investment and there is concern about the size of allocations to Bitcoin. “Obviously, volatility is something a lot of investors are concerned about,” Cappelli says. “They need to manage the size of their allocations. We recommend investing a small part of their portfolios that will grow over time.”

Looking out five years into the future, 91% of respondents to the Fidelity study who are open to exposure to digital assets in a portfolio expect to have at least 0.5% of their portfolio allocated to digital assets.

In a paper—“The Case for Bitcoin for Institutional Investors: Bubble Investing or Fundamentally Sound?”—researchers Jim Kyung-Soo Liew, an associate professor in finance at the Johns Hopkins Carey Business School, and Levar Hewlett, a recent graduate from the Johns Hopkins Carey Business School, attempted to provide some insight into this industry and provide some empirical evidence that Bitcoin can be quite attractive for the institutional investor.

The researchers found Bitcoin provides unique diversification benefits for traditional institutional portfolios, and that the diversification benefit appears to be stable over the period they examined. They also concluded that Bitcoin is very volatile but the historical returns compared to risk appear attractive. However, using standard portfolio optimization tools, they found that the optimal allocation to Bitcoin is 1.3% over the sample they examined.

Bitcoin More Accessible to Institutional Investors

There is also some concern about the friction of getting into Bitcoin. “Investors can’t just go to a broker or a Fidelity and get it,” Cappelli says. “However, there are different managers working to give investors easy and cheap access. That is the goal of Galaxy.”

When considering investing in Bitcoin, Cappelli suggests institutional investors do their homework about who they are investing with and look at the backgrounds of employees. “While Bitcoin is not mainstream, there are good solutions that solve for trading, custody, tax, audit and legal issues for investors,” he says.

Cappelli adds that there has been a tremendous amount of institutional infrastructure introduced in the digital asset space, which has helped with pricing and logistical concerns. He cites Bloomberg’s efforts on data and Fidelity’s custody solutions. A number of firms offer crypto over-the-counter (OTC) trading desks, and the big five audit firms and name-brand legal firms have joined the space over the past two to three years. “This makes Bitcoin better for investors and addresses the concern about the friction of getting into Bitcoin,” Cappelli says.

He adds that it is always important to remember that investing in digital assets is a new space. There are many sensational headlines and misnomers, but Bitcoin and digital assets have a lot of things investors are used to, Cappelli notes. “It may not be as easy but it is certainly up to par from a due diligence standpoint,” he says, adding that there are also cheap ways to access Bitcoin; simple passive vehicles offer great exposure.

Investors will look to their peers to see who is investing in this space, Cappelli says. “Investors at every level—pensions, endowments, foundations, asset managers and allocators—are starting to invest in this space,” he says. “Bitcoin has graduated to be a real tool in these portfolios, and I believe this will be a theme in 2021.”