The State of Wisconsin Investment Board recently announced its landmark purchase of $99 million worth of IBIT shares, BlackRock’s spot Bitcoin ETF. This groundbreaking move marks the first investment in Bitcoin ETF shares by a public pension fund.
While this is the first instance of a state pension fund acquiring shares of a Bitcoin ETF, it’s not the first foray into Bitcoin by a pension fund. In October 2021, the Houston Firefighters’ Relief and Retirement Fund invested an undisclosed amount in Bitcoin through institutional bitcoin services provider NYDIG. This was before spot ETFs were available, providing a safer and easier alternative to direct Bitcoin purchases. Experts anticipate that many more large pension funds will soon follow Wisconsin’s lead.
The rationale behind incorporating Bitcoin into a pension fund’s portfolio is straightforward. As Michael Saylor eloquently describes, holding large cash reserves is akin to sitting on a “melting ice cube” due to inflation steadily eroding cash value, leading to guaranteed losses for investors.
Traditionally, pension funds aim to balance the need for providing guaranteed returns to retirees with prudent risk management. This typically involves investing primarily in government bonds, which are considered low-risk and yield stable returns. Blue-chip stocks and investment-grade bonds have also been reliable options. For many years, these three asset classes were the only permissible investments for pension funds by law.
However, following the Global Financial Crisis (GFC) and the subsequent period of near-zero interest rates, pension funds have had to adopt more creative strategies to generate returns. The associated regulations have also relaxed over time. Compounding the challenge, bond yields have increased dramatically since 2022. While shorter-duration Treasury bills have become attractive due to higher interest rates, the overall value of bonds has decreased, causing losses for holders of long-duration government debt.
This evolving financial landscape has significantly contributed to the recent trend of pension funds exploring investments in Bitcoin. The State of Wisconsin Investment Board’s strategic move into Bitcoin ETF shares reflects a growing recognition of the potential for Bitcoin to hedge against inflation and diversify portfolios, potentially safeguarding future returns for retirees.