Is now the time for pension schemes to invest in Bitcoin?

Without a doubt, its roughly £1.5m foray into the cryptocurrency was one of the most controversial investment decisions of 2024 – with one expert after another weighing in to declare what a monumental mistake the anonymous investor had made.

However, Cartwright, the consultant responsible for advising on the 3% allocation to the now 16-year-old cryptocurrency says it is in talks with several other investors and that "hundreds" of UK pension funds could greatly benefit from such a holding.

"Our key message is that Bitcoin should be on a long list of asset classes to consider," says Cartwright director of investment consulting Sam Roberts.

He explains: "It makes complete sense for this pension trust and many others. That doesn't mean it's risk free - nothing is risk free - but as part of a diversified portfolio it addresses investment risks that other typical assets don't, whilst also giving substantial upside growth potential."

Commentators lined up to call it irresponsible but in the few months since the allocation was made, Roberts looks to be right about the upside – at least for now.

The exact date the investment was made has not been disclosed but since the mid-point of October the price of Bitcoin has risen by nearly 70% – surging from £50,018.54 on 15 October to £84,198.04 yesterday (22 January).

Indeed, on the back of Donald Trump's emphatic US election win at the start of November the price of the cryptocurrency has taken off, with investors seemingly smitten by Trump's promises to create a strategic Bitcoin stockpile as well as a crypto advisory council.

The upshot is the unnamed pension fund's exposure to Bitcoin has already grown substantially since the allocation was made, while the same size investment in the FTSE 100 would have grown only marginally (by around 1% over the same period).

Roberts says: "Hundreds of other UK pension trusts could benefit from a non-zero exposure to Bitcoin within a well-diversified portfolio.

"We are talking to some, and we have the capacity to talk to more. We can help ensure trustees are allocating to Bitcoin for the right reasons and understand both the upside and downside risks."

He adds that his firm has been approached by around 50 individuals previously unknown to the consultancy who are "unhappy with their current large pension providers".

Other schemes globally are also "dipping their toes into buying bitcoin" – with an article from the Financial Times last week (16 January) noting that US schemes for the states of Wisconsin and Michigan are among the top holders of US stock market funds devoted to crypto, while some pension fund managers in Australia had also made small allocations in recent months to bitcoin using funds or derivatives.

The exception not the rule

Critics, however, do not believe other pension funds will follow suit and that the latest move will be the exception rather than the rule. They cite the cryptocurrency's volatility and pension scheme trustees' well-documented reluctance to take risk as significant blockers.

"It was only a matter of time before a UK pension scheme bought into Bitcoin, but this isn't likely to spark a stampede into the asset class," says AJ Bell head of investment analysis Laith Khalaf.

He points out that, while this may be the first UK pension scheme to invest in Bitcoin, it is not the first institutional investor to do so. Investment firm Ruffer also took an exposure in 2020, though sold out shortly after at a profit because of what it called a "speculative frenzy". Four years after this apparent breakthrough for the cryptocurrency, there has not been a groundswell of similar multi-asset funds buying Bitcoin.

"The Financial Conduct Authority says those investing in Bitcoin should only do so with money they are willing to lose in its entirety. That doesn't sound like a tagline for something that fits comfortably into a pension scheme being run on behalf of members," Khalaf says.

XPS Group chief investment officer Simeon Willis agrees. When asked if more UK pension funds might do the same, Willis says: "Hopefully not."

He notes: "The investment case for crypto falls down in several areas, and we haven't seen any interest from UK pension schemes in relation to crypto currency investment. Aside from the price risks involved, crypto currencies don't pay interest.

"We consider Bitcoin unsuitable as an investment, as it fails to meet any of our criteria for a strategic allocation. It is not a reliable store of value, is not a source of expected capital growth and does not serve as a risk hedge or diversifier."

In a detailed paper on the subject XPS says a lot of the arguments presented around investing in Bitcoin seem to rely on the notion that if an allocation is small enough, it does not matter how risky it is or what its fundamental value is. But the firm believes this is directly at odds with how a well-designed portfolio should be constructed.

Willis explains: "Even if Bitcoin did meet these criteria a 3% allocation is excessive for such a volatile single asset. It is interesting that none of the other 10,000-plus crypto currencies available feature in the holding.

"This is not a bet on crypto currencies as an asset class, this is a bet on a single name. If we translate this into another asset class, it would be surprising to find a scheme had invested all its global equities in one stock."

Khalaf adds: "A 3% allocation might not sound like a lot, but it's enough to make a sizable impact on performance should Bitcoin head for the stars, or alternatively find itself on the digital scrap heap."

Futureproofing schemes

In its defence Cartwright says trustees are increasingly looking for solutions to "future-proof" their schemes in the face of economic challenges. It claims that the Bitcoin allocation is a strategic move that, not only offers diversification, but also taps into an asset class with a "unique asymmetric risk-return profile".

Roberts says: "Bitcoin is new and different, and so takes some time to get familiar with it. The key reason why we've seen reluctance to invest is about not wanting to be first.

"Whilst there is a first mover financial advantage, there is also reputation risk, particularly for a professional trustee because it is new, and it appears that most people don't yet understand Bitcoin. Over the last couple of years, we've seen plenty of personal professional trustee curiosity but sadly a reluctance to be the first to invest for the schemes they are looking after."

The consultant believes this hesitance creates an opportunity for trustees who are willing and able to consider all the investment options available to them, or maybe those trustees that already understand Bitcoin but did not have the adviser support to enable them to invest properly.

"Pension scheme members should be asking their trustees if they have actively considered a small Bitcoin allocation and, if not, why not," he says.

Too much to lose

Create Research chief executive Amin Rajan is not convinced. While he is willing to accept that a few more UK funds may be tempted to invest in Bitcoin given that the new Trump administration is likely to push valuations into what he calls the "stratosphere", he suggests there is just too much to lose for trustees.

"The vast majority of pension funds outside the US view Bitcoin as a highly speculative trade loaded with reputational and career risk on top of financial risk," he says.

"Bitcoin investment is for risk-takers who are willing to gamble their own money and can stomach the gut-wrenching volatility. Pension funds, in contrast, have legal obligations to millions of members. For them, Bitcoin investing is too much of a shot in the dark."

And that is perhaps why the pension fund has decided, up until now, to remain anonymous. What we do know is that the allocation was made in October last year, it was carried out by a defined benefit pension scheme and that the fund has £50m of assets in total. No other details have been revealed.

Willis says: "It is not surprising at all that the pension scheme wishes to remain anonymous. It is likely some members would have strong views about such an investment."

In response, Roberts says: "Sadly there remains a huge Bitcoin knowledge and understanding gap within the UK pensions industry and so the prudent approach is to remain anonymous for the time being.

"This hasn't been helped by a lack of teaching about what money is within the educational system and professional qualifications. When most people realise that the financial education they received and paid for missed such a crucial topic they react by humbly knuckling down to investigate further. Unfortunately, some others lash out emotionally. Either way, Bitcoin doesn't care and keeps confirming a block of transactions roughly every 10 minutes."

Chris Newlands is a freelance journalist who has previously worked as an editor at the Financial Times, inews.co.uk and Financial News