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@ Fundamentals
2025-04-10 21:14:26https://www.spglobal.com/ratings/en/research/articles/250327-cryptocurrency-is-growing-within-u-s-state-reserves-and-statewide-pension-plans-13455336
I've watched pension plans repeatedly fumble the ball over the past 30 years. In the 80s and 90s they were run, not by CFOs, but out of Human Resources by nonfinancial officers who repeatedly enriched the benefits during an era of double-digit interest rates which had the liabilities so low that companies weren't allowed to contribute to them. Once CFO's figured out what they inherited, they continued to ignore the fix because their worldview was the risk-ignorant FAS87 accounting standard that incentivized risk maximization by allowing immediate recognition of expected returns while smoothing upon smoothing the volatility in the future. Even the smarter ones who adopted Liability Driven Investing ( LDI) eventually discovered their ruin by borrowing against their unrealized gains only to cause a liquidity crisis in 2022 when the UK gilts spiked out of control, necessitating a $60B bailout from the Bank of England.
It is a nonstop series of loss and dysfunction. Now "cryptocurrency" is entering the scene as if to offer the industry one last chance they don't deserve to snatch victory from the claws of defeat. If, by cryptocurrency, one means Bitcoin, then we might have a fighting chance still in this game. If one means any of the other altcoins, then they might as well pack their bags and surrender before they commit a worse offense than Canada's OTTP plan, who directed $100 million of its pension invested in FTX, while the CDPQ had $150 million in Celsius, both now bankrupt with their CEOs in prison
My upcoming book, "Bitcoin for Institutions" explains why Bitcoin is a godsend for pensions and other potential institutional use cases. It also explains why Blackrock understands Bitcoin much more than people want to give them credit for. I argue that Blackrock is looking to redefine Modern Portfolio Theory by abandoning bonds and inserting Bitcoin as the "risk-free asset" and that this is an existential solution stemming from being the primary investment manager impacted by the aforementioned Bank of England bailout. It appears now that S&P Global also understands Bitcoin. To what end is unclear to me, but I have to give credit where it is due. From their recent report titled "Cryptocurrency Is Growing Within U.S. State Reserves And Statewide Pension Plans", by credit analysts Todd Kanaster and Geoffrey Buswick, several items caught my eye and impressed me. Among them were from the summary of opportunities and risks (from the report):
Opportunities
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Bitcoin holdings may provide a hedge against long-term debasement of fiat currency through inflation, due to bitcoin's finite supply. Its value may also be driven by geopolitical factors if its security and decentralized nature lead to its increasing adoption as a reserve asset.
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Other crypto assets such as ether or Solana are similar to technology venture investments, as they provide exposure to upside if these technology platforms continue to see increasing adoption.
The first bullet demonstrates a clear acknowledgement that S&P understands and approves the messaging of what Bitcoin's biggest strength is. It is an astonishing acknowledgement of how debasement is a feature of fiat currency and how Bitcoin is the solution. They go as far as to explain how the decentralized nature and security carry out the solution.
The second bullet is icing on the cake, separating other crypto assets and classifying them, not as a monetary cornerstone, but as just some other potential source of return.
Risks
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Market value risk: Historically, their prices have been volatile. They would introduce a risk factor if included in funds that are intended to cover an issuer's short-term liquidity needs (which typically do not include asset types with significant market value risk).
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Operational and cyber: Although direct ownership of crypto requires specialized infrastructure and staffing, much of the risk is adjusted to levels comparable with those of traditional investments when held, in lieu of direct crypto ownership, in shares of a crypto ETF from a third party investment manager with robust operational practices.
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Goal misalignment: Grouping all non-stablecoin crypto together under the same risk profile may overlook unique risk characteristics among different types of investments, such as bitcoin ownership, technology investments, or tokenized securities.
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Regulatory uncertainty: We have seen a large swing in the regulation picture at the federal level from the new U.S administration and similar changes could happen again, either due to leadership change or even a downturn in crypto prices if that reduces investor interest.
S&P is showing a superior understanding of the risks of Bitcoin. They echo several of the risks I discuss in the book. They caution against using Bitcoin with a short-term time horizon (1st bullet), as well as admonish the idea of grouping altcoins with Bitcoin (3rd bullet). Additionally, the 2nd bullet warms my heart discussing the additional operational risk involved when trusting custody to a 3rd party, as Blackrock (and all of the Bitcoin ETF providers except for Fidelity) does. We've already seen that Coinbase uses pre-Segwit legacy addresses for the ETFs and that Blackrock is beginning to explore other options for its custodian.
It is important that pensions get this right, as it is unlikely that the Gods will be sending another lifeline. Getting this wrong will lead to a bailout that will make the Bank of England's look tame in comparison. Instead of letting the central bankers pick the winners and losers, companies and states are going to get one last chance to win on their own terms. A medium-term time horizon, and a strong understanding of what Bitcoin is and what gives it its value, is the blueprint for a road map to recovery and a series of successful, solvent plan terminations in the next 5-10 years.
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