Pension Funds Investing In Crypto Is A Big Deal!

Bitcoin is back near $4,000, its highest level since early January.  The rally in crypto is across the board as BitcoinCash, Ethereum, Litecoin, Monero and XRP are all at or near their 30-day highs.

I believe that much of the recent strength is the market reacting to multiple stories about public pension funds starting to make investments in cryptocurrencies (or at least make those investments public).  For me, the first story that attracted my attention was that two public pensions funds anchored Morgan Creek’s new $40 million Blockchain Venture Capital Fund as reported on forbes.com and elsewhere. After that, several stories about the University of Michigan’s endowment investing in crypto linked funds also surfaced.  I find the endowment’s investment particularly intriguing as it does seem like a natural fit for universities to be more involved in crypto given how many millennials have embraced crypto.

I have had the pleasure of meeting @MarkYusko of Morgan Creek and discussing what it would take to gain more institutional traction in the crypto space.  It is unclear whether the issues have been solved, but these public disclosures of these investments are important for several reasons:

1. It is extremely difficult to get pension funds to make allocations into new asset classes.  I have worked with pension funds and they generally have a lot of rules, regulations and procedures that they need to follow.  This is not like walking into a Family Office that manages $100 million or more and convincing them to take a shot at something revolutionary.  Family Offices are typically run at the discretion of one or two individuals who have a high degree of flexibility.  Public pension funds, by their nature and mandate are not typically designed to make dramatic changes to their portfolio or to ‘dabble’ in something just because it seems interesting.  I have not read the documents for the funds that have made these investments, so I cannot confirm that they had to put in a lot of time and effort to get permission to bring these investments to fruition, but I think it is safe to say, that they likely did.
2. If some funds did it, it is likely other funds will too.  I know that there are many funds that have been looking at the crypto space but have been reluctant to be a ‘first mover’.  These funds are not designed for investment flexibility and many will have been reluctant to start the daunting process because they believed the likelihood of success was low.  Now that some funds have done it, others are likely to follow (or are already following that path, just not publicly).  I know that Morgan Creek was a pioneer in getting pension funds to invest in hedge funds and it seems as though they are trying to repeat that process with this new asset class and are starting to meet with success – as are other fund managers and advisors.
3. Pension Fund Consultants are the Holy Grail.  If a flood of pension fund money is going to come into crypto, it will have to be released by the fund consultants.  These consultants hold the keys to the castle as many funds rely heavily on their recommendations for asset classes.  From what I have read or discussed so far, I don’t think the big fund consultants are embracing the idea.  At least not yet.  But getting the consultants on board is the obvious next step.  The consultants tend to be very conservative and methodical.  They tend to want to see proven track records before making allocations.  They are in many ways the stewards of the funds they work with (whether or not there is an actual fiduciary responsibility).  That mentality will force them along a plodding path, but if they reach the end of that path, it is a potential game changer for the market.

Are these first investments that are being disclosed enough to make me re-visit my current bearishness on crypto?  You bet!  This has the potential to alter the landscape dramatically if this trickle turns into a flood.

Are there reasons to remain cautious?  Yes:

1. Will this money ever materialize or is this going to be limited to a few very aggressive funds looking to gamble a small percentage of their assets on out-sized gains?  Like so much with the investment world, if crypto investments and cryptocurrencies surge, more funds will follow.  If the recent rally fades and things like Bitcoin head back towards $2,000, there will be far less incentive for other funds to follow suit.
2. Will the money back technologies and platforms or will it go directly into cryptocurrencies?  The former seems easier to justify than the latter, but it is the latter that is responding right now (or at least the cryptocurrency prices are observable and marching higher).

For the first time in about 18 months I am neutral on Bitcoin and crypto.  I have a lot of doubts, and a near term pullback would not surprise me, but real participation by pension funds would push prices higher and move the technology forward.  I will be following up on this development closely as I have seen, over and over, how quickly these initial investments can snowball into so much more (I have also seen cases where it never went past the early adopters).