Why your retirement fund might soon include cryptocurrency

Pension funds are investment pools that manage people’s retirement savings. They aim to encourage long-term saving and provide financial security to retirees. But some pension funds in the US, UK and elsewhere have recently begun investing in cryptocurrencies, an asset class renowned for its volatility.

In the US, for example, bitcoin derivatives such as exchange-traded funds (ETFs) are becoming a popular choice for pension schemes in the states of Wisconsin and Michigan. ETFs are baskets of investments that can be bought and sold on a stock exchange and aim to replicate the performance of a given market.

Bitcoin and ethereum ETFs track the prices of these cryptocurrencies, offering fund managers exposure without the need to buy or manage digital assets directly.

The interest in cryptocurrencies is being driven by their surging price. In December 2024, on the back of Donald Trump’s endorsement of digital assets throughout his presidential election campaign, the price of bitcoin hit US$100,000 (£81,600) for the first time in history. It then shot to around US$110,000 on the day of Trump’s inauguration.

This surge has the potential to generate substantial short-term profits for investors, including pension funds. But pension funds operate under strict fiduciary duties – a set of legal and ethical obligations requiring them to prioritise low-risk, stable investments over speculative opportunities. And some experts have raised concerns about whether the move into crypto could undermine the stability of people’s pensions.

Daniel Wiltshire, an actuary at financial planner Wiltshire Wealth, told Sky News in November 2024 that one unnamed UK pension scheme was “deeply irresponsible” for investing 3% of their assets in bitcoin. Cryptocurrencies are infamous for their volatility, risk of fraud, and susceptibility to speculative price bubbles.

The value of a cryptocurrency is largely derived from collective belief and perception rather than intrinsic financial fundamentals. This makes cryptocurrencies vulnerable to manipulation and rapid shifts in sentiment. So, should this trend continue and pension fund managers invest heavily in cryptocurrencies, then a crypto price crash could jeopardise retirees’ savings.

Such a crash has happened before. In 2022, Canada’s Ontario Teachers’ Pension Plan lost a US$95 million investment after the FTX crypto exchange failed. Following this loss, the fund decided to avoid further investments in crypto due to high uncertainty.

Despite Trump’s endorsement, there is still a possibility that the current bitcoin price boom is yet another bubble. Cryptocurrencies remain relatively new as an asset class, so the lack of long-term performance data makes it difficult to assess their suitability for inclusion in a pension fund portfolio.

However, pension funds are under increasing pressure to explore alternative investment options to enhance returns. Larry Fink, the CEO of American investment company BlackRock, warned in March 2024 that America’s ageing population had put the US retirement system under “immense strain”.

And in the UK, analysts predict that the pension system will reach a crisis point within the next two decades. This may result in retirees receiving less than expected, and seeing a significant drop in their living standards. Crypto derivatives could be seen as one of the few viable solutions to meet countries’ growing retirement commitments.

Crypto’s long-term value

The bottom line is whether bitcoin and ethereum prices will continue to grow. Crypto advocates believe that bitcoin’s scarcity, driven by its fixed supply cap of 21 million coins, suggests its value should increase over time. In contrast, sceptics question why something without any tangible value should cost anything at all.

Almost 95% of bitcoin has already been “mined”, or created. As the available supply diminishes, the mining process becomes increasingly difficult and energy intensive – a deliberate design feature of the bitcoin network.

Miners need to use more advanced hardware and consume more electricity to compete in solving the mathematical puzzles required to create new bitcoins. And as a result, only the largest mining pools (groups of miners who combine their hardware to increase computational power) will be able to compete in and profit from the current cryptocurrency boom.

The cost of mining is often cited as justification for bitcoin’s fundamental value, as it reflects the resources and energy required to produce it. However, once mining ceases and bitcoin reaches its full supply, miners will shift to relying solely on transaction fees charged to bitcoin users to incentivise their maintenance of the network’s security and integrity.

This raises questions about bitcoin’s long-term value and utility for regular users. If transaction fees become excessively high, bitcoin could lose its appeal for frequent transactions, limiting its functionality as a medium of exchange.

The ease with which powerful and influential people can leverage and disrupt the crypto market further contributes to the uncertainty surrounding bitcoin’s future.

Trump launched his own cryptocurrency – or “meme coin” – perfectly timed just before his inauguration. Over the pre-inauguration weekend, $Trump coin’s market capitalisation soared to US$15.1 billion. Not to be outdone, “first lady” Melania Trump followed suit and launched her own crypto coin.

While some customers may push for pension funds to break away from their conventional low-risk ethos and explore opportunities in the volatile crypto market, the risks cannot be ignored. High market volatility, regulatory uncertainty and potential misalignment with long-term investment goals pose significant challenges.

Pension funds must carefully balance the demand for innovation with their responsibility to protect retirees’ savings, ensuring any foray into crypto is both prudent and sustainable.