How Cryptocurrency Could Soon Be a Part of Your Retirement Savings
Pension funds serve as collective investment vehicles that oversee the retirement savings of individuals. Their primary goal is to promote long-term savings and ensure financial stability for retirees. However, a growing number of pension funds in the US, UK, and other regions have started to venture into cryptocurrencies, a market known for its high volatility.
In the United States, for instance, bitcoin derivatives such as exchange-traded funds (ETFs) are gaining popularity among pension schemes in states like Wisconsin and Michigan. ETFs are collections of assets that can be traded on stock exchanges and seek to mirror the performance of a specific market.
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Bitcoin and ethereum ETFs follow the price movements of these cryptocurrencies, allowing fund managers to gain exposure without the necessity of directly acquiring or managing digital assets.
The surge in interest in cryptocurrencies is primarily fueled by their skyrocketing prices. In December 2024, boosted by Donald Trump’s support for digital assets during his presidential campaign, the price of bitcoin reached $100,000 (£81,600) for the first time. Subsequently, it soared to approximately $110,000 on inauguration day.
This upward trend presents the possibility of significant short-term gains for investors, including pension funds. Nonetheless, pension funds are bound by strict fiduciary responsibilities – a framework of legal and ethical obligations that prioritize low-risk, stable investments over speculative ventures. Some experts express concern that this foray into cryptocurrencies may jeopardize the stability of pension holders’ savings.
Daniel Wiltshire, an actuary at financial consultancy Wiltshire Wealth, commented to Sky News in November 2024 that one unnamed UK pension scheme was “deeply irresponsible” for investing 3% of its assets in bitcoin, given the notorious volatility, fraud risks, and the tendency for speculative bubbles associated with cryptocurrencies.
The value of cryptocurrency is largely rooted in collective belief and perception rather than intrinsic financial indicators. This characteristic renders cryptocurrencies susceptible to manipulation and swift shifts in public sentiment. Should the trend persist and pension fund managers make substantial investments in cryptocurrencies, a price crash could potentially threaten the savings of retirees.
Such a scenario has occurred previously. In 2022, the Ontario Teachers’ Pension Plan in Canada incurred a loss of $95 million following the collapse of the FTX crypto exchange. Consequently, the fund opted to refrain from further investments in crypto due to the prevailing uncertainties.
Despite Trump’s backing, there remains a possibility that the recent bitcoin price surge is merely another bubble. As cryptocurrencies are still relatively new as an asset class, the lack of historical performance data complicates assessments of their suitability for inclusion in a pension fund portfolio.
Nevertheless, pension funds are facing mounting pressure to investigate alternative investment avenues to improve returns. Larry Fink, CEO of the American investment firm BlackRock, warned in March 2024 that the ageing population in America is placing “immense strain” on the US retirement system.
In the UK, analysts predict a crisis in the pension system within the next two decades, possibly leading to retirees receiving less than anticipated, along with a significant decline in their quality of life. Crypto derivatives may be perceived as one of the few viable options to address the growing retirement obligations facing countries.
Crypto’s Long-Term Value
The crux lies in whether the prices of bitcoin and ethereum will continue to appreciate. Proponents argue that the scarcity of bitcoin, rooted in its capped supply of 21 million coins, indicates its value will rise over time. Conversely, doubters question why an asset lacking tangible value should carry any price tag.
Nearly 95% of bitcoin has already been mined. As the supply dwindles, the mining process becomes more complex and energy-intensive – a fundamental aspect of the bitcoin framework.
Miners must adopt more advanced equipment and use more electricity to solve the mathematical challenges involved in generating new bitcoins. Hence, only the largest mining pools – aggregations of miners pooling resources for greater computational power – will be positioned to profit from the current cryptocurrency boom.
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The expenses associated with mining are often cited as a rationale for bitcoin’s fundamental value, as they reflect the resources and energy invested in its creation. However, once mining ceases and the total supply of bitcoin is reached, miners will have to depend solely on transaction fees levied on bitcoin users to motivate their continued security and maintenance of the network.
This situation raises important questions regarding bitcoin’s long-term value and utility for everyday users. If transaction fees become prohibitively expensive, bitcoin may lose its attractiveness for regular transactions, limiting its function as a medium of exchange.
The ease with which influential figures can manipulate and disrupt the crypto market adds further uncertainty concerning the future of bitcoin.
Trump introduced his own cryptocurrency – or “meme coin” – just before his inauguration. Over the weekend prior to the inauguration, the market capitalization of $Trump coin reached $15.1 billion. Following closely, “first lady” Melania Trump also launched her own cryptocurrency.
While some may advocate for pension funds to diverge from their traditional low-risk strategies and explore opportunities within the volatile crypto landscape, the associated risks are substantial. High market volatility, regulatory unpredictability, and potential misalignment with long-term investment strategies represent significant challenges.
Pension funds must carefully navigate the balance between innovative investment opportunities and their commitment to safeguarding retirees’ savings, ensuring that any venture into crypto is both judicious and sustainable.
Larisa Yarovaya, Director of the Centre for Digital Finance, Associate Professor in Finance, University of Southampton
This article is republished from The Conversation under a Creative Commons license. Read the original article.