First published on Pension Funds Online
In November 2024, Cartwright announced that we had enabled the first UK occupational pension scheme to introduce a small (3%) allocation to bitcoin. Whilst there was some healthy scepticism, and we suspect that many were waiting and watching quietly, the general response we received was overwhelmingly positive.
Since then, the bitcoin price has risen by over 50%. So, has the opportunity now passed? And is it worth asking your adviser about it? What has become clear is that the UK pensions industry is well behind the curve on this topic. The good news is that this provides an opportunity for those that can be nimble. Also, with more DB pension trusts looking to run on with a long investment horizon, and DC pension trusts looking at how to boost members pension pots, all risks and options should be considered.
One barrier seems to be that there is a generally low understanding of what money is, what makes a good money, and the implications of a better or worse money. This is not a surprise because the history and characteristics of money are generally not taught at school, university, nor in professional exams. Those that are interested in further reading may wish to explore the Bitcoin Diploma produced by myfirstbitcoin.io or The Bitcoin Standard book by Saifedean Ammous.
Many traditional financial models and investment advisers find it impossible to value bitcoin. Maybe that’s because every price we see is really two numbers: a numerator and a denominator, and the financial models focus on valuing numerators not denominators. So, the US dollar price of a barrel of oil can really be thought of as the value of a barrel of oil divided by the value of a US dollar. We can then see more easily that the US dollar price of oil could be due to the value of oil changing, or the value of the US dollar changing (or maybe a bit of both). Bitcoin is designed to be a denominator (money), although we currently see the bitcoin price measured in US dollars.
One useful, albeit subjective, method to assess the potential for the bitcoin price is to look at the potential market for a better form of money. Bitcoin can be better than gold because it is much quicker and cheaper to move across large distances and verify that it is real bitcoin when it arrives, and bitcoin can be better than government fiat currencies because the ultimate supply is fixed at 21 million bitcoins compared to the potential unlimited supply (and therefore the tendency for gradual and sometime sudden debasement) of each government currency. So, if we start with the idea that bitcoin could emerge and replace gold as a form of money, that gives a potential 8x return for bitcoin from the current circa $100,000 per bitcoin. Greater potential is possible by exploring the marginal price, what a monetary premium is, and why there could be more “emergency money printing” of government fiat currencies by central banks.
There can be an underappreciation of the benefits of a non-inflationary money when we compare it to GBP Sterling because GBP Sterling isn’t great, but it’s not too bad, losing maybe 7% of value each year. However, if we compare it to an emerging market currency losing 50% of value each year then the benefits are much more stark, particularly if the local government is highly authoritarian and corrupt. Most of the global population is living under this more difficult situation and therefore tends to spot the problems with bad money and the benefits of good money more quickly than us in the West.
Another common concern is that bitcoin uses a lot of energy and is therefore bad for the environment. However, bitcoin could become massively valuable to society (needs another blog!) and is very good at finding wasted or stranded energy (including methane emissions) because they are cheaper, plus it can accelerate the adoption of renewable energy sources through grid stabilisation and bridging the revenue gap between the build and the grid connection. Alex Gladstein of the Human Rights Foundation and Daniel Batten are great sources of information on this topic (find them on podcasts or social media). Those who are interested in social factors or the environment should therefore be interested in bitcoin as part of the solution.
So, in summary, there are lots of hurdles to understanding bitcoin and its potential, and some conclusions are counter intuitive. However, trustees have a fiduciary duty to act in the best interest of their scheme members, and this includes exploring new ideas that could have a material impact on both the members and the sponsoring employer.
Therefore, what’s the downside of asking your investment adviser how a small allocation to bitcoin could impact your objectives or introducing a bitcoin DC self-select option? In any case, bitcoin should probably be added to your risk register given the potential impact it could have on your existing assets due to the monetary premium effect, and on the covenant strength of the employer if bitcoin is more widely adopted throughout society as a form of money.
Sam Roberts – Director of Investment Consulting at Cartwright
