Should Pensions Invest in Cryptocurrencies?

Jack Tatar, Managing Partner at Doyle Capital Management and Editor for Forbes CryptoAsset & Blockchain Advisor, sent me a guest comment a month ago which I've been sitting on but have been meaning to publish:

I’ve been writing about bitcoin as a new asset class and viable investment option since 2013 when I began a series of articles documenting my journey to find a bitcoin based investment for my retirement account (you can access the series of articles here). As a former financial advisor and corporate executive with a major U.S. wirehouse, I recognize the value of asset allocation and prudent portfolio analysis.

Recognizing bitcoin as an alternative asset for portfolio allocation is not a stretch for me. The lack of correlation with equities and bonds, along with a compelling risk/reward profile makes it an alternative asset class to consider for investors’ portfolio. This approach provided much of the foundation for my book, “Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond” (co-authored with Chris Burniske). In fact, during the writing of the book, I met with Harry Markowitz, father of Modern Portfolio Theory and Nobel Prize winner to discuss my thoughts and evaluate the use of traditional financial analysis tools such as MPT and Sharpe Ratio for bitcoin and cryptoassets.

Since 2013, I’ve heard bitcoin dismissed by knowledgeable investors and financial industry leaders as a “ponzi scheme” and “rat poison squared”. With apologies to Jamie Dimon and Warren Buffett, it’s neither of those things and it seems that each year they seem to reconcile themselves to the reality of bitcoin as a viable investment option. Over the last year, we’ve seen financial firms such as Goldman Sachs provide detailed analysis reports on bitcoin and crypto based trading desks have begun to appear at major financial firms to trade directly in the asset and on its futures markets.

Institutions are using the bitcoin futures markets and regulator-friendly crypto trading firms such as Gemini to trade these markets for the benefit of their firms’ bottom line. Additionally, major endowments for Harvard, MIT and Stanford have recently invested into bitcoin. This year, Harvard’s endowment fund made a cryptocurrency investment worth about $11.5 million (this will make up less than 0.05 percent of Harvard’s endowment, valued at nearly $40 billion). In fact, a recent survey found that 94% of endowments had invested in bitcoin and crypto based investments over the last year.

However, for the individual investor, getting involved in bitcoin and cryptoasset trading has been limited and oftentimes restricted to accredited investors or savvy individual investors who have to understand the intricacies of working directly with exchanges such as Coinbase. The SEC has regularly dismissed all potential bitcoin ETFs proposed to them and although there’s an investment called GBTC, which looks like a bitcoin based ETF but has not been approved by regulators and trades at a high premium (with high fees as well), it’s an option that is not available to all investors as it trades on the OTCQX.

As I’ve spoken around the world over the last 5 years describing how investors can achieve increased returns with an alternative asset allocation of 5-10% in their portfolio, it’s been a message that most take back to their financial advisor or 401k provider and all they hear is that they can’t partake in it as an investment option. So, as bitcoin continues to provide astronomical returns including being the top performing asset of 2019 and over the last ten years, an easy to invest bitcoin option has eluded the individual investor.

For the past 3 years, Fred Pye, CEO of 3iQ and his team have worked within the regulatory framework to gain approval for a bitcoin exchange traded product that can be accessed by all levels of investors. In February of this year the Ontario Securities Commission (OSC) denied the company’s filing for a non-offering preliminary prospectus for their Bitcoin Fund. Pye and his team decided to challenge the ruling by putting the onus on Canadian regulators to prove why the product is not in the “public interest” and that their denial impedes financial innovation in the country.

In October of this year, the OSC provided a favorable ruling regarding 3iQ’s Bitcoin Fund (the Fund) and announced that they would issue a receipt for a final prospectus of the Fund, paving the way for a closed-end bitcoin fund to be listed for trading on a major Canadian stock exchange. This is the first time that a securities regulator has directly approved such a regulated exchange traded product for all levels of investors and stands in stark contrast to the US’s Securities and Exchange Commission which has denied all bitcoin ETFs.

In a press release, Fred Pye said, “Over the past three years, we have worked actively with the OSC’s Investment Funds and Structured Products Branch to create an investment fund that we hope will allow retail investors the benefits of investing in bitcoin through a regulated, listed fund. We have addressed the questions of pricing, custody, audit, and public interest issues in a regulated investment fund. We intend to refile the prospectus as soon as possible as the next step in bringing this ground-breaking fund to investors.”

Pye expects the fund to list on the Toronto Stock Exchange (TSX) by year end, providing investors of all levels access to gaining bitcoin exposure easily in their investment portfolios. “We look forward to offering retail investors exposure to this exciting new asset class within registered and traditional investment accounts” said Howard Atkinson, Chairman of 3iQ.

Over a three-year period of seeking this approval, 3iQ not only took the arduous path of directly working through the regulatory framework but created the fund with the partnership of leading firms in the crypto and investment space. Jan van Eck, CEO of VanEck, which is a leading ETF provider and partner with 3iQ, said “We were pleased to work closely with 3iQ in both the development of the index and in working with the regulators to address their concerns. We are obviously impressed with the determination and persistence of our Canadian partners.”

The 3iQ fund also works with Gemini Trust LLC, which is run by, Cameron Winklevoss as its custodian of the fund. Winklevoss said, “3iQ has carefully selected a team of professional partners with expertise in the digital asset industry to construct a safe and secure fund product for the Canadian market, and we are excited to be selected as its custodian.”

Although it will take time for this investment to make its way into the hands of individual investors, this is a huge plus for not only investors but for the institutional business as well. This decision will help pension plans feel comfortable placing the 3iQ product appropriately within the alternative asset sleeve of their portfolio, potentially closing the gaps on current shortfalls. Forward thinking 401k providers can provide 3iQ’s regulated bitcoin investment product as an option for investors, potentially helping them to gain returns that can help them achieve their retirement goals. Current research also shows that millennial investors, which is a demographic that current wealth management firms are struggling to reach, are very interested in bitcoin investing and providing them this option in their personal and retirement accounts will provide competitive advantages and new clients to those firms who step up and offer it.

The boldness of the OSC to recognize that the new asset class of bitcoin requires an easy to use investment product shows a level of innovation that is missing from US regulators. Thanks to trailblazers like Fred Pye and his team at 3iQ, their persistence will allow investors to gain easy access to a compelling and rewarding asset class. It will also provide those financial institutions willing to innovate and look to the future with a competitive advantage over those who won’t, as well as potentially new revenue and clients.

Now, as stated above, Jack Tatar is editor of Forbes’ ‘Cryptoasset and Blockchain Advisor’ newsletter and co-author of “Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond". He’s a shareholder and an advisor to 3iQ.

Before I begin, I want to fully disclose that Fred Pye, President & CEO of 3iQ, is a supporter of this blog and we have had several discussions in the past which put me at ease that a) he's not a crypto snake oil salesman trying to scam investors and b) he really does have an expertise in this field which isn't as simple as many make it out to be.

Fred is also a very nice and down to earth person who understands the investment landscape and definitely believes that cryptoassets deserve an allocation in retail and institutional portfolios.

Let me also fully admit I remain highly skeptical on cryptocurrencies but not the blockchain technology underpinning them.

In fact, in 2017, a broker buddy of mine was beyond certain he was going to retire stinking rich after investing $200,000 of his money in bitcoin. I thought he was nuts, just like I thought my friends loading up on weed stocks were out of their mind.

Turns out, I was right on all fronts, the bubbles in bitcoin and weed have burst, leaving behind many investors who thought they were going to retire stinking rich:

Still, I wanted to look more in-depth at bitcoin because many endowment funds have invested, even if it's a token amount, and given that unorthodox monetary policy has made all asset classes across public and private markets overvalued, where are investors looking for a safe store of value suppose to turn to?

Ray Dalio thinks a 10% allocation to gold is warranted, and he may be right, but others think gold is losing its luster now that cryptos have been introduced and younger millennials are more inclined to invest given they understand the blockchain technology backing them.

Like I said, I am very skeptical, and if you ask my opinion, the big money in 2019 isn't investing in cryptos but finding the next big blockbuster biotech company which is on the cusp of curing cancer or some other disease.

Just have a look at the chart of Axsome Therapeutics (AXSM) this year:

The stock is up more than 1600% since hitting a 52-week low of $2 and it keeps surging higher (don't chase it!).

And the funny thing is I can show you many more similar charts of small biotech companies whose stock went parabolic, like Neoleukin Therapeutics (NLTX) which is surging today (don't ask me why, don't touch it!):

But when it comes to biotechs, I understand the micro, macro and secular forces at play, and the risks that go along with investing in them (even the best biotech funds get burned badly on some of their picks).

When it comes to cryptoassets, it's a bit of a leap of faith and there is this Ponziesque feel to the entire thing where early investors reap the bulk of the rewards and late investors get burned when the bubble bursts.

But the fact that Fred Pye convinced the Ontario Securities Commission to approve 3iQ's Bitcoin Fund for retail investors tells me they did their homework and think it's a fund that offers investors some important level of diversification.

I openly wonder if pensions are looking at bitcoin or other cryptoassets but if they are, I invite them to pick up the phone and contact Fred Pye at 3iQ (you can also email him at fpye@3iQ.ca). As I stated above, he really knows his material inside out and is very helpful and nice.

Lastly, take the time to read more on the Grayscale Investment Trust here and a great article by Tom Rodgers of Forbes, Secrets Inside Crypto ETPs and ETFs - What's Hiding Behind The Risk.

Below, Jack Tatar speaks with Manuel Stagars about his book "Cryptoassets" (written with Chris Burniske), why the real value of bitcoin is not zero (answering to Adriano Lucatelli), the real value of the crypto ecosystem, financial companies dipping their feet in the crypto waters, tools for analysis and management of crypto portfolios, risk and reward of cryptoassets, comparing them with other assets, institutional investors and cryptoassets, evaluating crypto investments and founders, the ideology of decentralization, and when banks will exchange Bitcoins for US dollars.

And Fred Pye, president and CEO at 3iQ, joins BNN Bloomberg to talk about the firm's Bitcoin fund which has just gotten the greenlight from the OSC and will list on Canada's major exchange.

By the way, before you dismiss cryptocurrency funds as a fad, I did note that Fidelity just launched its cryptocurrency business in Europe yesterday. Stay tuned, maybe there's more than meets the eye here.