Blockchain technology can now add “pension funds” to the long list of industries it is disrupting. Fairfax County Employees’ Retirement System and the Fairfax County Police Officers Retirement System have deemed blockchain development a worthy investment. So, Virginia’s police department is the first to go on the books as official investors in blockchain-based technology using pension funds.
These two separate pension funds collectively manage $5.1 billion in assets for the state’s police force. This includes a $40 million investment in the Morgan Creek Blockchain Opportunities Fund, which backs multiple blockchain startups and will eventually invest in actual cryptocurrencies.
Really, this is just another example of the growing awareness of blockchain applications. JPMorgan‘s new token demonstrates how cryptocurrencies are used to facilitate fiat transfers. As such, the news should not come as a surprise to those who have watched blockchain and cryptocurrency grow over the past 10 years.
The chief investment officer of Fairfax County’s police officer’s retirement system, Katherine Molnar, states that:
“Blockchain technology is being applied in unique and compelling ways across multiple industries. We feel it is important to be opportunistic and are excited to participate in this emerging opportunity.”
The pension fund created by Morgan Creek Digital in New York currently includes investments in Bakkt, cryptocurrency giant Coinbase, Blockfi, RealBlocks, TrustToken, Harbor, Open Finance Network, CityBlock Capital, Namebase, Good Money and Digital Assets Data.
There is some talk of using as much as $4 million to purchase cryptocurrency directly. For now, however, investments are in the technology that runs applications, rather than coin assets.
Co-founder & Partner at Morgan Creek Digital, Anthony Pompliano, consults to address concerns about the risks involved in crypto investments and how they are different from traditional assets.
In the near future, the blockchain fund expand opportunities to invest in cryptocurrencies. However, at present, they are primarily interested in the companies building the infrastructure for blockchain products.
Since March of 2018, Pompliano has been raising a separate fund of about $500 million. This is the money he plans to use for investing in cryptocurrencies in the near future. He’s interested in asset-backed tokens for pension funds, since they use blockchain to represent shares in everything from works of fine art to real estate. Asset-backed tokens are becoming increasingly interesting for those who are not ready to invest in non-fiat cryptocurrencies.
Pension funds showing interest
Fairfax County’s pension directors are not the only ones who are acknowledging the potential benefits of long term crypto and blockchain assets. Both Yale and The University of Michigan are casting their nets into the crypto-world waters.
Recently, the University of Michigan’s committed $3 million of a $12 billion endowment to a dedicated fund that invests in crypto-technology companies. Andreessen Horowitz created this new investment strategy. Horowitz is a Menlo Park, California based venture capital firm.
Broadly, the acceptance of crypto-assets by large institutions, such as universities and pension funds, can be interpreted as good news for cryptocurrency. By seeing this newly onboarded market, this may be a signal for the wider acceptance of digital currencies. Many believe that it’s only a matter of time before more establishments begin to recognize their asset value.
As investors begin to take the crypto-market more seriously, and more long-term investors on board, the better the future looks for blockchain applications and cryptocurrency.
Despite the fact that there is more potential now for long-term success, there are still a lot of unknowns around the value of cryptocurrencies and certain blockchain technologies. There seems to be little doubt that digital currencies are here to stay in some form or another.
But predicting the long-term success of cryptocurrency assets is challenging to do so without a sizable amount of long-term data. Still, there are many reasons to be optimistic about many of the new projects that out there, and it is hard to say what this lack of long-term data really means for the future of cryptocurrency.
The 2018 Cambridge Report Run-Down
The 2nd Global Cryptoasset Benchmarking Study from Cambridge University’s 2018 study shares helpful and promising insight into the future value of cryptocurrency.
Here are the highlights from the report:
- Total user accounts for blockchain and crypto assets now exceed 139 million. Of these users, at least 35 million are “identity-verified”. The growth is rapid, and represents 4X in 2017 and doubling again in the first three quarters of 2018.
- The cross-segment expansion has continued with 57% in 2018, of crypto-asset service providers are now operating across at least two market segments. Doing so provides integrated services for its customers.
- Multi-coin support has nearly doubled from 47% of all service providers in 2017 to 84% in 2018. The trend is attributed to the emergence of common standards on some crypto-asset platforms. An example is Ethereum’s ERC-20. This measure has resulted in a rapid increase in the supply of tokens.
- Trends in mining cryptocurrencies have many developments as well. The majority of mining facilities use some share of renewable energy sources. The study estimates that “as of mid-November 2018, the top-6 proof-of-work crypto assets collectively consume between 52 and 111 TWh of electricity per year.” However, renewable energy sources a fair share of the energy consumed by mining pools.
- Mining is less concentrated than commonly perceived. Crypto-asset mining appears to be less concentrated geographically. Cambridge’s mining map demonstrates that hashing 2nd Global Cryptoasset Benchmarking Study 11 facilities and pool operators are globally distributed. And there are growing operations in the USA and Canada.
- Crypto-assets are largely self-regulated. These self-regulatory efforts reflect growing industry maturity. Industry actors are pro-actively adopting measures that appear to comply with existing regulation, despite not necessarily being explicitly subject to regulations.
What Does This Report Mean for Crypto and Pension Funds?
Our first takeaway from the Cambridge review is that blockchain and cryptocurrencies are improving in scalability and broad application. No longer are savvy investors overlooking crypto-assets. The merits of the technology, as well as the motivation to create a new market of value, are real. In short, cryptocurrencies are valuable assets, and there is no sign of the rate of adoption slowing. This is all very good news for this young, burgeoning industry.
The concerns that the Cambridge report made are both accurate and unsurprising. The first is that the market is volatile. The pattern that the crypto-world is following closely resembles the dotcom bubble. The reason for this is the exponential growth in interest and attention from new retail investors, speculators, and institutional investors, not to mention the media attention the crypto-world receives.
Early on, the industry faced a massive inflow of new users and funds. Unfortunately, not everyone had the infrastructure in place to meet the demands for this surplus in customers and transactions. Despite some of these setbacks, growing interest from the institutional side helped to realize the emergence of more custom services that can better meet market demands. So, 2017 and 2018 saw many projects that combine the genius of crypto-world with the savvy of the financial system.
Some challenges to bring crypto pensions to life
It doesn’t seem likely that cryptocurrency will disappear any time soon. But what is uncertain is what cryptocurrency will look like in 20 years. Questions such as: what businesses will survive? and how much value will cryptocurrencies have? are indeterminate.
So, despite the positive data that Cambridge has offered, they are still suggesting to act conservatively and to invest no more than 1% in pension funds and endowments.
The worry from certain experts is longevity; right now there is none, so for many institutions, taking a stance so early on may come off as irresponsible. Because of the massive adoption rate as well as the serious volatility of the market, making realistic long-term predictions is very difficult.
Moreover, currently, there is no intrinsic value to most cryptocurrencies, with the exception of asset-backed tokens. As such, people like Carlino are still calling crypto-assets “speculative” and “high risk.”
Early investors hope to find the “next Bitcoin.” However, it is important to remember exactly how unique Bitcoin’s currency and Ethereum platform is in this exploding market.
Why Pensions Should Consider Getting on Board
Given the results of the Cambridge study, 1% seems like a good place to start for now. The survival and improvement of cryptocurrencies have a better chance at success if crypto-assets can capture smart long-term investors, like Virginia’s police pension.
It is important to remember that in 2017, the total crypto asset market capitalization increased from $18 billion in January to a whopping $600 billion in December. On the one hand this kind of valuation is exciting. However, with numbers like this, it is hard to say how many of these companies will survive in the competitive crypto-asset market.
This is not to say that crypto-assets will not be valuable. Any study to demonstrate the long-term success of crypto-assets has its limitations. The limitation is that they are still so young. For now, we will have to rely on other market markers to make savvy investment decisions. And until then, plenty of day traders and speculators will continue to enjoy crypto’s volatility, ultimately helping to improve liquidity and the robustness of these markets.
Basic economic principles tell us that diversity in the market is key to a healthy portfolio. It could be that blockchain techhnologies and cryptocurrency offer just what the market needs. Pompliano sure thinks that crypto-assets are a potential solution to the concerns over pension funds. And with the Bitcoin’s sans-fiat performance in the last quarter, it is definitely worth considering.