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Can Crypto be the Solution to the Plight of Pension Funds?

As George Soros said ”Once we realize that imperfect understanding is the human condition, there is no shame in being wrong, only in failing to correct our mistakes.”

Every once in a while, it is fun to zoom out and take a look at the world outside crypto, which is, to put it mildly, quite immense, and which fact, to put it not so mildly, sadly lost on quite a few crypto arrivistes.

Last week, in some of the research we were looking into, we stumbled upon some interesting analysis on the state of global pension plans (the pension plans of the developed world that can afford such luxuries at any rate). The 30,000 foot view of course is fairly well known – better access to increasingly better healthcare resulting in populations living longer across most of the developed world, combined with inadequate savings for retirement, and high personal and governmental debts.

The state of the global pension funds seems to be growing worse with every passing year. Pension funds are the 800-pound gorillas of the institutional investment universe, with over $40 trillion in AUM. By comparison, the total capital managed by hedge funds globally stands at $3.2 trillion. Pension fund managers are highly risk averse by default, as they need to meet future obligations (pension payouts) with a high degree of certainty. For this very reason, pension fund investments are heavily skewed towards ‘safe’ assets such as bonds and stocks, with a portion invested in a catchall bucket termed ‘alternatives’; this could contain anything from tracts of forests in Canada, Lithium deposits in Argentina to traditional venture capital, private equity, real estate and other such traditional alternatives.

Source: Willis Towers Watson

With near-zero bond yields for the better part of the decade since the 2008 crisis, pensions have been left with modest returns, but growing payout liabilities, and therefore a widening pension deficit. Pension deficit is the difference between the current value of assets and the present value of expected future pension obligations, and this key metric does not look good for a majority of pension funds, across governments and corporates. The pension deficit in the US currently stands at $4 trillion dollars, which is roughly equal to the US Fed’s balance sheet, and this number is growing every year as pension fund managers struggle with the task of achieving adequate returns to balance their books. The average annual yield requirement for pension funds to meet their obligations is around 8%, and only a handful of them have managed to consistently deliver around or above that number over the past few years.

Could cryptos be the lifejacket that sinking pension plans are looking for in their quest to stay afloat in a turbulent, increasingly choppy global economy, especially with increasing volatility in a inclement climate of political and macro risks, and rate hikes on the horizon? From a risk diversification perspective, cryptocurrencies make sense as they have exhibited low correlation with other asset classes in the past.

From a return standpoint, cryptocurrencies are definitely an asymmetric bet with extremely high upside – imagine gold’s market cap – $7.7 trillion vs Bitcoin’s current market cap of $111 billion for the store-of-value hypothesis, for instance; and a limited downside (~10% of Apple’s market cap for BTC, as an example) if they fail. Conservative institutional investors have rightly been averse to cryptocurrencies due to their unique risks. With traditional wall street regulars as well as crypto native startups both making strong inroads towards solving the puzzle that is institutional custody services, risk-averse managers may finally be getting ready to embrace the new digital asset class.

The classic ‘Yale model’, an institutional asset allocation framework, was pioneered by Swensen at the Yale endowment, and numerous other fund managers have been trying to copy this with varying levels of success. The Yale endowment recently became one of the earliest institutions, if not the first, to make a sizeable investment into a crypto fund. It will be great for cryptocurrencies as an investment thesis if institutional investors around the world follow the Yale endowment into cryptos as well.

Meanwhile in Crypto Wonderland….

“DMG Launches Crypto Mining Farm” DMG Blockchain has announced that its new crypto mining facility in Canada is now operational. Located in British Columbia, the farm takes advantage of the abundant hydro-electric power available in the west of the country. DMG claims that 60 megawatts of the new farm’s power is now being used, with the facility expanding to 85 megawatts at a later date. It covers a total of 27,000 square feet on a 34 acre site.

“Colorado Task Force Issues Orders Against 4 ICOs” Colorado State Securities Commissioner Gerald Rome has issued a cease and desist order to four ICOs for allegedly offering unregistered securities, according to an official notice. The orders come as part of a state operation by the ICO Task Force within the Department of Regulatory Agencies (DORA). DORA has now issued 12 cease and desist actions against ICOs.

“CZ: Crypto Bull Run Incoming” In an interview on CNBC, Binance CEO Changpeng Zhao (CZ) stated that the crypto market and Binance are still in a good position even after nearly a year of downward price movement. According to CZ, the number of new users and the amount of crypto Binance hold are increasing very steadily so the amount of BTC held in cold wallets has been increasing consistently.

“US Museum Accepts Bitcoin”Great Lakes Science Center, a large museum and educational facility in downtown Cleveland, Ohio, will begin accepting Bitcoin as a payment method beginning November 13. Kirsten Ellenbogen, the CEO of Great Lakes Science Center, said that the institution decided to accept crypto to facilitate the growth of the local blockchain ecosystem.

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