How Bitcoin Could End Up in Pension Fund Portfolios

The Securities and Exchange Commission’s (SEC) approval of new spot bitcoin exchange-traded funds (ETFs) could see sophisticated investors such as pension funds grow their exposure to digital currencies over time, according to Cambridge Associates.

The SEC gave the green light to several ETFs last week after more than five years of steadfastly rejecting applications for similar products tracking the spot price of bitcoin, the leading digital currency.

The market regulator previously cited concerns that such products could be vulnerable to fraud and market manipulation, but last week SEC chair Gary Gensler said approval of new ETFs was “the most sustainable path forward”.

The SEC has approved 11 ETFs for listing in the US, including funds from Fidelity, Invesco, BlackRock, Grayscale and Ark Invest.

Joe Marenda, head of hedge fund research and digital assets investing at Cambridge Associates, said that the decision was unlikely to have much of an effect on asset owners in the short term as the few that were interested in digital assets would already have exposure through other means, such as closed-ended funds.

However, other types of investors such as hedge funds may look to increase their exposure using the new ETFs or related derivatives, Marenda said, “especially those funds with quantitative and macro strategies”.

In addition, he said, “retail flows to these bitcoin ETFs will likely be substantial”.

“These flows will improve the market’s depth, increase options and futures activity, and attract more hedge funds to the space,” Marenda explained. “As a result, sophisticated investors may acquire modest exposures to the space over time via existing hedge fund exposures.”

SEC Still Skeptical

In his statement, SEC chair Gensler emphasized that the approvals were focused on allowing ETFs to hold one “non-security commodity” and should not be perceived as approval of listing standards for digital currencies or other crypto assets.

“Nor does the approval signal anything about the Commission’s views as to the status of other crypto assets under the federal securities laws or about the current state of non-compliance of certain crypto asset market participants with the federal securities laws,” Gensler said.

He added: “Though we’re merit neutral, I’d note that the underlying assets in the metals ETPs [exchange-traded products] have consumer and industrial uses, while in contrast bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing.

“While we approved the listing and trading of certain spot bitcoin ETP shares today, we did not approve or endorse bitcoin. Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto.”

Cambridge Associates’ Marenda said the regulator’s stance was unlikely to change before the next presidential election.

How Regulation Will Work

The SEC’s approval comes with additional investor protections including transparency requirements and rules aimed at preventing fraud and manipulation, as well as rules governing how the products are sold and distributed.

Gensler said the SEC would use its experience in overseeing metals-related ETFs to help its work on bitcoin.

Marenda also drew a parallel with precious metals.

“Investors targeting bitcoin exposure will have to decide whether to hold the asset directly or via an ETF, much like the dilemma gold investors face,” he said. “Those investors that prefer to hold gold bullion will likely also prefer to hold bitcoin directly. But, as with gold, investors will need to decide if a speculative bitcoin investment makes sense in their portfolios.”

On 9 January, shortly before the announcement of the approval, the SEC’s account on X, formerly Twitter, was compromised. According to the regulator, an unknown and unauthorized party accessed the @SECGov account and posted twice regarding the approval of spot bitcoin ETFs.

The SEC quickly regained control of the account and the posts were deleted.

In a statement, Gary Gensler said: “The SEC takes its cybersecurity obligations seriously. Commission staff are still assessing the impacts of this incident on the agency, investors, and the marketplace but recognize that those impacts include concerns about the security of the SEC’s social media accounts. The staff also will continue to assess whether additional remedial measures are warranted.”