We’ve talked about Bitcoin in previous posts. We’ve wondered what this instrument is in terms of an asset category because we think that the volatility in pricing would suggest that it isn’t a currency. Unlike the US $ and other fiat currencies, there is no willingness from these countries to accept Bitcoin as a payment of taxes due. Is it a commodity? I suspect that many supporters of Bitcoin and other cryptocurrencies would suggest that it is new age gold, but is it? What is the underlying value of a Bitcoin? At least gold has a use in the manufacturing of jewelry and in electronics. What can you do with a Bitcoin?
I bring this subject up once more because it has been announced that a public pension plan has invested $25 million in Bitcoin and Ethereum. The allocation to each has not been disclosed. The CIO believes that there will be long-term value-add from an investment in this cryptocurrency and believes that it does a better job of providing an inflation hedge than other asset categories. Bitcoin has been around for roughly 11 years. It has gone through a number of boom and bust cycles, but it hasn’t “lived” through an inflationary environment. I’m not sure how one can make a determination that it is the best inflation hedge let alone an adequate one.
Given the fact that there is no underlying value to a Bitcoin or any other cryptocurrency, the “investing” of $25 million is a purely speculative investment. But advocates would claim that Bitcoin has a limited issuance. That is true, but there are dozens and dozens of cryptocurrencies with no barriers to entry keeping others from being issued. Just look at Dogecoin for how easy it is to issue a crypto. So, cryptocurrencies in their entirety are hardly rare and limited.
Should pension plans be permitted to invest in purely speculative investments? Will this plan’s willingness to dive into the crypto pool open the floodgates to others following suit? We’ve recently seen the first Bitcoin ETF launched (the ProShares Bitcoin Strategy ETF) with great market fanfare. However, this vehicle isn’t buying Bitcoin, but derivatives that are designed to closely track the price movement. What’s next? As a reminder, the primary objective for a pension plan should be to secure the promised benefits at a low cost and at reasonable risk. Does investing in this instrument fit that objective?