Nothing says retirement like a nice beach, a little golf and some bitcoin.
Wait, what?
Investors overseeing some of Michigan’s massive public pension system are dipping their toes in the water when it comes to cryptocurrency. While the current amount of money devoted to bitcoin and another popular currency is relatively small, it’s still a signal the State of Michigan Retirement System is prepared to go where many other comparable funds are not.
As of late July, the State of Michigan Retirement System had about $6.6 million invested in bitcoin, the most well-known form of cryptocurrency, said Ron Leix, a spokesman for the state treasury. The fund also invested $1.4 million in Grayscale ethereum ETF, he said. Ethereum is one of the other most popular digital currencies.
But that belies bigger movement: Over the last two years, Leix confirmed the fund invested roughly $45 million in cryptocurrencies. The dividends are striking: Leix said the state already recouped its initial investment, and earned an additional $39 million solely from the cryptocurrency. In cryptocurrency parlance, Michigan’s assets are “to the moon.”
Of that return, Leix said investors returned about $20 million to the fund.
Yet the investments represent exceptionally small portions of the $107.5 billion total fund. And, despite any gains, there’s no current push to dive deeper.
“Cryptocurrency doesn’t play a major role in our investments,” Leix said, noting a private company hired to invest some of the fund made the cryptocurrency decisions.
“There isn’t an active strategy to invest in bitcoin and cryptocurrencies.”
The company making these choices, an investment management company named ARK Invests, suggests cryptocurrencies offer a “new paradigm” for how people and economies use money.
“ARK believes cryptocurrencies will contribute more dramatically and profoundly to the evolution of monetary systems than any other breakthrough in history,” reads a portion of the company’s website explaining its cryptocurrency strategy.
Experts told the Free Press about the inherent risks associated with investments in cryptocurrencies. And apart from a few outliers — chiefly Wisconsin’s pension fund, which announced a far more sizable investment in cryptocurrency earlier this year — cryptocurrency investment appears to remain rare among large funds of this nature.
The Detroit Police and Fire Retirement System’s outside financial adviser Wilshire Associates has been doing white papers on bitcoin and cryptocurrency for several years and has not advised pension systems to invest money in this area, said Bruce Babiarz, a spokesperson for the Police and Fire Retirement System of Detroit.
The city’s police and fire pension fund is not invested in any cryptocurrencies, Babiarz said.
The police and fire pension system’s board oversees the $2.7 billion fund, which serves some 8,000 retired police and fire retirees and some 3,000 active duty first responders.
The rapid rise in recession fears in early August has triggered a sell-off in stocks, as well as cryptocurrency.
Bitcoin and ethereum plunged in trading on Monday to hit lows not seen in several months. Bitcoin fell 12% to $52,054, heading for its largest one-day fall since November 2022, according to Reuters. Ethereum slid as much as 21% to its lowest since January. Reuters on Monday morning noted that bitcoin has lost over a third of its value since hitting a record high in March.
Analysts noted that cryptocurrency is trading more and more in a similar direction as stocks, which undermines an earlier theory that cryptocurrency might be viewed as a “safe haven” for investors in times of uncertainty.
Much remains to be seen in the days ahead, should recession fears continue to ignite.
Crypto markets saw a flurry built of interest from conventional investors this year after the U.S. Securities and Exchange Commission gave the go ahead for exchange-traded funds to track the spot prices of bitcoin and ethereum.
The currencies are at a far different place now than they were a handful of years ago: Increasingly, they’re becoming a part of traditional retirement and investment portfolios, explained Scott Baker, associate professor of finance at Northwestern University.
“I think there is this strawman … everybody investing in crypto are kind of these crazy people, these tech bros or these people who are YOLO-ing their entire government savings into crypto,” said Baker, who helped author multiple papers exploring who invests in cryptocurrency and what they do with any gains.
“What we saw was that … the average crypto investor is actually more than active in traditional equity markets as well.”
Confused yet?
What are we talking about?
Cryptocurrencies are a form of digital currency, largely unregulated and infrequently used in the day-to-day transactions most people think about when they ponder how to use money. While new cryptocurrencies appear regularly, bitcoin tends to garner the most attention and is broadly considered one of the more stable currencies.
That said, the lack of regulation, coupled with the mysterious nature of bitcoin and comparable funds, make cryptocurrencies potentially very risky — or rewarding — investments, explained Gina Pieters, an economics professor at the University of Chicago who studies cryptocurrencies.
“The difficult thing with bitcoin as an asset is calculating its price trajectory. Unlike stocks or bonds, there are no underlying assets to price — its value derives from the purchase of sale of the item (bitcoin) itself, which is, in turn, used only within its own ecosystem (people don’t use it to make payments). It goes up as more people adopt bitcoin, and declines otherwise,” Pieters said in an email exchange with the Free Press.
“The returns on crypto (when good) are much higher than any conventional instruments. Of course, when the returns are bad, they are more extreme — with various coins dropping to zero value.”
Pieters noted there’s little chance at this point bitcoin bottoms out, but it’s absolutely common to see gigantic swings in value. Near the end of 2021, one bitcoin was valued at more than $64,000. One year later, it was closer to $16,500.
Leix noted there are “risk controls” in place for the state pension fund. The way he explained it, the more money that’s involved, the more controls in place.
“Risk is limited by the amount that a) each manager is given to invest b) and how much can go into a particular sector or specific company. We do look over funds for reasonableness and that they are adhering to the strategy they’re entrusted to follow. Risk controls are in place,” Leix said in an email.
Pieters said that, like any other investment, the choice to put money into cryptocurrencies comes down to an evaluation of the risk and reward.
“Whether it’s appropriate for a retirement fund, or what fraction is appropriate, is something that depends on the guidelines of the specific fund,” she said.
Who invests in cryptocurrency?
Currently, anywhere from 15% to 20% of the U.S. population either have or previously had a cryptocurrency investment, Baker said. And that number could be soft, given the lack of robust reporting requirements.
He and others examined transactions on one of the largest cryptocurrency exchanges, Coinbase, to get an understanding of the average cryptocurrency investor.
They found it largely mirrors more common investors: people with higher than average incomes, more comfortable with risk who already frequently invest through traditional means.
A lot of people are treating it as an investment of their investment portfolio. “As financial professionals, we teach students that you want to diversity your portfolio,” he said.
“They’re still investing in their traditional equity accounts, but they’re also putting a bit of money into crypto as well.”
He — and most others — advise if someone wants to buy cryptocurrency it probably makes sense to only invest a “small portion” of anyone’s available money for investments. That obviously varies for each person, but, in general, it safeguards against the volatility of the market.
Baker also found that those investing in cryptocurrency tend to treat any gains they earn like other investments: Largely, they leave the money invested.
“So when people win the lottery, they spend a tremendous amount of it. Or if they get a stimulus check, they spend a pretty large chunk of it up front. If they see gains in their crypto account or their equity accounts, they spend a much smaller fraction of it,” he said.
What impact will this have on Michigan pensions?
Today — very little. Tomorrow? Who knows.
This is new territory for large, traditional investors. Both supporters and opponents want congressional action: Those who favor the currencies expect legislation could normalize investments and increase the number of people investing. Critics — the head of the U.S. Securities and Exchange Commission chief among them — argue cryptocurrency markets are prone to rampant fraud and need substantial regulations.
But how would any of this impact Michigan retirees, at least those relying on returns from the Michigan public pension fund?
As Leix noted, the amount invested in cryptocurrency currently is so small, even losing every day would be a relatively small blip on the fund’s radar. He also pointed to a 2023 Yale University analysis that found Michigan’s fund had the second best return among comparable funds in other states over a recent five-year span.
In the long term though, this could note a shift. In Wisconsin, investment officials in May revealed investments of more than $160 million into what’s called a bitcoin “exchange-traded-fund,” or ETF, another way to invest in cryptocurrencies.
That’s still a fraction of the state’s massive fund, but at the time, experts told Wisconsin Public Radio that other public pension funds would take notice of the move.
Given Michigan’s healthy pension fund balance and its robust return on investment to date, more public entities might start shifting some money toward cryptocurrency as well.
