(Kitco News) – Institutional adoption of cryptocurrencies continues to ramp up as an unnamed pension fund in the United Kingdom has allocated 3% of its portfolio to Bitcoin (BTC), becoming the first in the UK to do so.
According to a report from Corporate Advisor, the unnamed firm purchased the Bitcoin on October 23 at a price of $65,800 with the help of pension and investment advisor Cartwright. The first ever defined benefit (DB) portfolio allocation to Bitcoin was done in part to promote Bitcoin as a “workplace savings proposition and a staff retention tool.”
Cartwright, a specialized firm that advises businesses, family offices, and charities on defined benefit and hybrid schemes, said this is their first time helping a firm allocate to Bitcoin through a DB scheme. To decentralize the management of the Bitcoin holdings, the firm devised an arrangement where the private key to the BTC wallet is split between five independent institutions.
According to Glenn Cameron, head of digital assets at Cartwright, the allocation was made after a lengthy consultation with the fund’s trustees, where ESG, investment case, and security were all discussed extensively.
“The logic is that it is an asymmetric investment opportunity,” Cameron said. “If you put in 2 percent, the maximum you can lose is 2 percent – if it goes to zero. But the upside is potentially significant. If you look at the correlations of Bitcoin with 14 other asset classes, the 60-day correlation centers around zero. Investors need certain investment horizons, and it needs to fit within their risk appetite.”
Cameron said he believes that Bitcoin is just starting a two-decade-long growth cycle that will be driven by the assets’ scarcity. He noted that the supply of gold increases by 2 percent a year, whereas Bitcoin increases by 0.83 percent currently, with its emissions scheduled to decline after every four-year halving until all 21 million Bitcoins are mined, at which point the supply will be capped.
Cartwright is also looking to launch a Bitcoin workplace savings proposition – dubbed the Cartwright Bitcoin Employee Benefits – which will enable employers to deposit Bitcoin into wallets created for their staff.
To help aid adoption, the firm plans to release four training videos to employees explaining how to access and use the Bitcoin they receive. The system is currently being tested internally, and Cartwright said there are already five companies interested in signing up for the offering.
As for the volatile nature of Bitcoin and digital assets and the risks that volatility poses to the long-term value of the funds that employees receive, Cameron noted that they are already exposed to volatile assets that put their portfolios at risk, but he sees the long-term potential of Bitcoin overshadowing near-term concerns.
“Staff can buy shares or ETFs that are leveraged at any time,” he said. “We explain to people this is a long-term savings vehicle. This is money you are saving for a minimum of eight years – two Bitcoin cycles. Putting in money on a monthly basis has not proven risky so far. Over 15 years, anyone who has pound-cost-averaged monthly for more than a year has never been down.”
Cartwright is also exploring the possibility of offering Bitcoin as an equivalent to a restricted stock unit as an incentive to key staff within unlisted companies.
“If you are an unlisted company, you can’t give shares because you are illiquid,” Cameron explained. “But you can do it with Bitcoin – we call them restricted Bitcoin units, held in an escrow account, and the employee gets them after three years.”
He noted that this setup also enables Bitcoin to be used to conduct cross-border payments and within corporate holdings, highlighting that this is a strategy used by more than 10,000 companies in the U.S.
“On the cross-border payments side, we are going to be able to give businesses the ability to send money around the world cheaper than with banks,” he said.
Cameron also pushed back against concerns that Bitcoin is not ESG-friendly, highlighting research that shows these concerns are overblown.
“The government and Bank of England hate the fact people may start to use Bitcoin rather than their currency,” he said. “That is why we hear it is bad for the environment.”
“KPMG and the Institute of Risk Management have published reports showing how it isn’t,” he noted. “It costs about $80,000 dollars to mine one Bitcoin at standard energy tariffs, but you can buy one for $66,000. How do they do this? Because they buy cheap energy. No Bitcoin miners use grid energy – they use renewables – in fact, they are subsidizing the cost of the energy by using energy that would have otherwise been wasted. 58 percent is renewable energy, and the sector will be carbon neutral by 2032.”
“Another common challenge from trustees is that it is used by terrorists and criminals, but a UN report has shown that 5 percent of criminal transactions are in national currencies,” he added. “In Bitcoin, we know that it is 0.36 percent. We say that Bitcoin is the best ESG asset in the world.”
According to Sam Roberts, director of investment consulting at Cartwright, the scheme’s investment time horizon is set for 10 years, so the 3% Bitcoin allocation is appropriate.
Roberts told IPE that Bitcoin’s “asymmetric return profile enables a small allocation to have a big positive financial impact, protected by the extensive risk management at both scheme and asset levels.”
“Trustees are increasingly looking for innovative solutions to future-proof their schemes in the face of economic challenges,” he added. “This Bitcoin allocation is a strategic move that not only offers diversification but also taps into an asset class with a unique asymmetric risk-return profile.”
“Our approach ensures that schemes can benefit from the significant potential upside whilst limiting the potential downside,” Roberts said. “Integrating Bitcoin into a pension scheme’s investment strategy is a bold step that reflects the forward-thinking nature of the trustees involved.”
Steve Robinson, Head of Investment Implementation at Cartwright, noted that “The operational procedures around this Bitcoin investment have been designed to maximize the security of the asset whilst allowing profits to be taken quickly as and when they arise.”
“By combining a highly secure custodial solution with a mechanism to quickly trim profits as they arise, we’ve opened the door for risk-averse pension schemes and other institutional investors to benefit from Bitcoin’s potential growth whilst managing volatility within a secure strategic framework,” he added.
And with a low minimum investment threshold, Robinson said that means “this option is available to pension schemes of all sizes, unlike many historic investment ideas when they first become available.”
Roberts concluded by suggesting this is just the start of Bitcoin allocation announcements as there is a second larger UK pension fund that Cartwright is working with on a similar scheme before noting that they are far behind in terms of a strategic decision.
