Pension funds must adopt Bitcoin – Bitcoin Magazine
This is an opinion editorial by Mickey Koss, a West Point graduate with a degree in economics. He spent four years in the infantry before transferring to the finance corps.
I’m going to use the California Public Employees Retirement System (CalPERS) as a proxy for your general retirement system. According to investopedia, CalPERS invested about a third of its money in bonds with a target annual return for the fund of 7%. Bonds are referred to as fixed income because of their predictable coupon payments. They are used for income, not capital gains.
Treasury average interest rates as of September 30, 2022
Recycling a chart from one of my previous articles – let’s assume the weighted average of government bond coupon rates is 2% to simplify some math (because it is according to the Treasury). With a 2% rate of return on a third of your money, it means that pension funds have to make a 9.5% annual return on the rest of their money, every year, without fail, or they risk not being able to fund their pension payments theirs. . There is no room for error.
So what happens when you start to feel the pressure but need to keep buying bonds by mandate, despite the lack of income? You start increasing your positions, a technique that nearly blew up the UK retirement space just a few weeks ago.
The Washington Post has a pretty good overview of the situation, but essentially pensions were forced to leverage their positions to boost yields and cash flows due to the prevalence of quantitative easing and low interest rates.
Channeling my spirit animal, Greg Foss, if you deliver a position 3x, it can increase your return from 2% to 6%, but leverage is reduced both ways. A 50% loss turns into 150% and starts eating away at your other positions and investments. This is exactly what happened in the UK, necessitating a bailout to prevent the liquidation of pension funds and systemic impact on the banking and lending system.
Enter bitcoin, leg on the left. Instead of leveraging positions to increase returns, I believe pension funds will be forced to adopt alternative investments such as bitcoin to help grow their fiat-denominated asset base and service the payouts to retirees.
I recently wrote an article about the debt spiral concept. While central banks are raising interest rates right now, they cannot continue forever, inevitably putting pension funds right back into the low-yield environment that led to the systemic problems.
Bitcoin has no risk of liquidation. Bitcoin does not require leverage. Instead of making risky bets, perpetuating the culture of moral hazard and socialized losses, pension funds can use bitcoin as an asymmetric opportunity to enhance returns.
I see this as inevitable as more and more asset managers realize that it is their duty to return to pensioners what was promised. As soon as one prioritizes, the dominoes will fall. Don’t be last.
This is a guest post by Mickey Koss. Opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc. or Bitcoin Magazine.