Pension funds and insurance companies are interested in a Bitcoin investment proposal.

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The popularity of Bitcoin among institutional investors is expanding to insurance providers and life and annuity companies.

Life insurance and annuity providers are gradually allocating a portion of their funds to Bitcoin (BTC). Although the top cryptocurrency has provided the highest returns over the last decade, the long-discussed institutional crowd seems to be finding its way to the BTC sector.

During the 2018 bear market, Bitcoin growth activities from different players seemed to be focused on strengthening BTC’s regulatory stance. These activities culminated in the creation of institutional-grade custody platforms, as well as other prerequisites for expanded involvement by controlled agencies.

Over the past year, publicly traded companies have started to include Bitcoin on their balance sheets, citing fears about fiat currency debasement. Large liquidity inflows from major central banks to fund government stimulus packages introduced to soften the economic blows triggered by the coronavirus pandemic make market analysts concerned about rising inflation.

With hedge funds and insurance companies joining other public institutions in investing in Bitcoin, the focus has shifted on whether governments can continue to invest in BTC through sovereign wealth funds. Meanwhile, 2021 continues to be a bullish year for the largest commodity by market capitalisation, with the March close marking the highest Q1 results in eight years.

Retirement funds holding Bitcoin

As previously reported by Cointelegraph, KiwiSaver, a $350 million retirement portfolio run by New Zealand Funds Management, recently invested 5% of its assets in Bitcoin. At the time, James Grigor, chief investment officer at NZ Funds, said that Bitcoin’s resemblance to gold makes it an appealing currency for life and annuity companies.

Grigor says that NZ Funds updated its bid documentation in 2020 to incorporate cryptocurrency assets in its portfolio. This transfer allowed the company to buy BTC in October, when the price of Bitcoin was about $10,000.

In less than six months, NZ Funds’ KiwiSaver product is likely to have profited almost sixfold on its Bitcoin investment. For the executive of the NZ Funds, Bitcoin offers a new range of prospects outside of the conventional asset path.

Indeed, after some price retracement, Bitcoin’s proven history of active compounding capabilities appears to be catching the attention of big-money players. Hedge funds, private firms, and publicly traded corporations have recently allocated reserves to Bitcoin.

Morgan Creek’s Mark Yusko and Anthony Pompliano described pension funds and insurance as a form of institutional investor that should consider investing in Bitcoin in 2018 and 2019. Pompliano estimated at the time that if pension funds did not actively seek portfolio diversification above the normal investments in bonds and securities, they would face major difficulties in fulfilling their potential commitments.

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Morgan Creek launched a blockchain-focused investment fund in February 2019, led by two public pension funds in the United States, among other partners. Since then, a few other pension funds and insurance providers have taken some sort of Bitcoin exposure.

MassMutual, a Massachusetts-based insurance company, has applied Bitcoin to its general investment portfolio. MassMutual allegedly purchased $100 million in Bitcoin from New York Digital Investment Group, as well as a $5 million equity interest in the firm.

MassMutual’s Chelsea Haraty explained the company’s Bitcoin investment thesis to Cointelegraph, adding that the decision was representative of the firm’s wider policy of capitalising on new markets while diversifying its asset portfolio.

“In addition, our investment in NYDIG and Bitcoin aligns with MassMutual’s overall commitment to innovation, giving us measured yet meaningful exposure to a growing economic aspect of our increasingly digital world. Importantly, our $100-million investment in Bitcoin through NYDIG represents .05% — or less than one-tenth of 1% — of our total GIA.”

Haraty’s description of MassMutual’s Bitcoin investment as “measured and significant” echoes the sentiments of industry advocates such as Yusko and Pompliano, who have urged insurance companies and pension funds to invest in Bitcoin. Indeed, for institutional investors, 1% is often regarded as an appropriate proportion for BTC exposure.

Hedging dollar-denominated liabilities

Michael Sonnenshein, CEO of Grayscale crypto fund, said in January that pension funds were fueling the growth of the crypto asset management business. Endowments and pensions, according to Sonnenshein, were among the active participants in the firm’s Bitcoin trust.

NYDIG CEO Robert Gutmann has also reported that life and annuity firms are gradually reevaluating their investment allocation in order to engineer any Bitcoin exposure.

Gutmann claimed in a virtual podcast with Raoul Pal, an investment analyst and founder of Real Vision, that many life-and-annuity firms were inquiring about investing in Bitcoin. According to Gutmann, the recent push for BTC exposure for pension funds and insurance companies has gone beyond worries about currency depreciation to concerns about the dangers of providing inadequate protection for dollar-denominated liabilities, stating:

“If you look at the world today on a forward basis, it is reasonable to be asking yourself as an investment committee or as an allocation committee [if] having all of [their] assets denominated in dollars against dollar-denominated liabilities is the right allocation mix.”

The current coronavirus pandemic has not shielded pension funds from the economic pressures it has caused. In July 2020, Japan’s Government Pension Investment Fund, widely regarded as the world’s biggest, recorded a first-quarter loss of $165 billion, nearly the market capitalisation of Bitcoin at the moment. The loss reflected the market chaos triggered by the events of March 12, 2020, dubbed “Black Thursday.”

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While not as heavy as the dents taken by pension funds during the global financial crisis of 2008, COVID-19 has negatively impacted the performance of many pension funds around the world. According to a report by Bloomberg back in February, the Ontario Municipal Employees Retirement System, or OMERS — one of Canada’s largest pension funds — recorded a 2.7% asset decline on a year-on-year basis.

The current coronavirus pandemic has not shielded pension funds from the economic pressures it has caused. In July 2020, Japan’s Government Pension Investment Fund, widely regarded as the world’s biggest, recorded a first-quarter loss of $165 billion, nearly the market capitalisation of Bitcoin at the moment. The loss reflected the market chaos triggered by the events of March 12, 2020, dubbed “Black Thursday.”

Amid the substantial losses suffered by pension funds during the 2008 global financial crisis were calls for reforms in the private pension sector. Indeed, pension funds in countries under the Organization for Economic Co-operation and Development umbrella lost an estimated $3.5 trillion due to the crisis.

The foregone opportunity by not adding more Bitcoin exposure is becoming more visible for OMERS and other pension funds facing their highest withdrawals since the 2008 crisis. To place Bitcoin’s superiority of conventional assets in context during the COVID-19 period, BTC has increased by more than 650 percent since the World Health Organization declared the coronavirus a pandemic in March 2020.

Sovereign wealth funds next in line?

Apart from hedge funds and insurance companies, sources suggest that sovereign wealth funds may become the next big players in the institutional Bitcoin investment scene. Governments, according to NYDIG’s Gutmann, are still in discussions with the firm about allocating some of their funds to BTC.

Though direct exposure is most certainly the focus of these discussions, Norway’s oil fund — the government’s pension fund — has an indirect Bitcoin investment. With over $1 trillion in reserves, the world’s largest sovereign wealth fund has indirect BTC exposure through its investment in business intelligence company MicroStrategy.

During his podcast appearance with Pal, Gutmann announced that Temasek, Singapore’s sovereign wealth fund, is also a Bitcoin investor. According to Pal, Temasek, which has an asset base worth approximately $306 billion, has been purchasing virgin BTC from miners.

According to market pundits such as Pal, sovereign wealth funds would carry a “wall of liquidity” into the Bitcoin room. A surge in retail purchasing force will almost certainly drive another parabolic rise in BTC’s stock. Bitcoin, like insurance and life and annuity providers, is likely to be a viable investing instrument for use as a hedge against dollar-denominated liabilities.

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