Time for a bitcoin revolution for UK pensions?

In March 2024, the price for a single bitcoin exceeded $73,000 (£57,400), representing a new all-time high in the cryptocurrency’s 15-year history, according to data from Statista.

The peak was partly driven by the approval of bitcoin exchange-traded funds (ETFs) in the US, with European and Australian regulators also signing off listed products and funds for exchanges.

Once seen as a retail investment play, the cryptocurrency is gaining traction in mainstream finance, with the State of Wisconsin Investment Board – one the US’s largest public pension funds, with over $156bn in assets – announcing it held around $160m in two bitcoin ETFs in the spring.

In the UK, at the end of May the London Stock Exchange listed its first range of cryptocurrency exchange-traded notes, providing investors with access to asset-backed investments in bitcoin and Ethereum.

How long will it be before a UK pension announces it has allocated to a cryptocurrency?

Ready to digitise

Glenn Cameron, senior investment consultant and head of digital assets at Cartwright, says two of the firm’s pension schemes clients are on the verge of investing in bitcoin.

These would be the first UK pension schemes to allocate funds holding the cryptocurrency.

More funds are now expressing an interest as trustees are recognising its potential as a future staple allocation in their portfolios, he says.

“We’ve definitely seen a massive transition from bitcoin being a predominantly a retail investment to an institutional asset,” he adds.

Cameron notes that private equity and private debt were once considered as new investment options and faced significant resistance from trustees and fund managers. “Now, a very significant portion of every defined benefit pension scheme holds both of those assets,” he says.

However, Simeon Willis, chief investment officer at XPS Pensions Group, says his firm has not witnessed any drive from clients to explore or invest in bitcoin.

“A couple of years ago, the question was raised occasionally in trustee meetings of whether they should consider it when it was becoming more mainstream and in the papers, but it hasn’t been raised by any of my buyers in the last six months,” he says.

He explains that the disinterest in bitcoin does not stem from a lack of awareness, but instead trustees are approaching it with a level of scepticism due to the associated risks.

Even if clients express interest in the cryptocurrency, XPS actively recommends that clients do not invest in it, Willis adds.

Risk management

Willis argues that bitcoin not only fails to align with the risk profiles of pension schemes, but it is also ill-suited to their investment objectives.

“It’s a purely speculative investment. It fails on too many levels to be a suitable investment for institutional investors or even personal investors. The only real role it has for a personal investor is a bit of fun, as much as going to the horses or going to the casino,” he says.

In particular, the highly volatile nature and lack of security associated with bitcoin renders it an unsuitable choice for trustees, he says.

Yet, Cameron argues that bitcoin can be suited to schemes’ profiles since every investment within a portfolio carries some degree of risk that is mitigated by balancing it with others. Therefore, he suggests trustees apply the same approach to bitcoin.

Despite its reputation for volatility, if funds allocate only a small percentage of the entire portfolio, the risks are minimal, Cameron contends, while the potential returns could be significant.

“In 2020, bitcoin was $3,000 and now it’s $70,000, so it’s 23 times the price,” Cameron says. “If you make a 2% allocation in a portfolio and you have that type of performance, if you don’t rebalance, it’s going to end up being half the portfolio. But what’s the worst that can happen? You lose 2% of your portfolio.”

In a recent paper, David Krause, emeritus professor in the Finance Department at Marquette University in Milwaukee, said the rise of bitcoin ETFs could broaden investor participation in the market, “enhance market liquidity and potentially lead to greater price stability”.

The Wisconsin pension fund’s entry into the bitcoin market “validates its potential, increasing demand and driving up prices”, Krause said.

“Despite its modest size, this investment in bitcoin is a strategic move that could accelerate mainstream adoption of cryptocurrency by institutional investors,” he added.

Further reading

Desire for cryptocurrencies is ‘deeply concerning’ (2 July 2021)