State employees in Fairfax County, Virginia may be looking ahead to retirement with a pension funded by a less conventional investment class – cryptocurrency.
In what is understood to be a first, two pension funds that support state employees have invested in a digital assets based venture capital fund, Bloomberg reported on Tuesday.
Fairfax County Police and Fairfax County Employees’ pension plans – which combined, are responsible for managing $1.2 billion in assets – are the two pension funds that have invested in Morgan Creek Blockchain Opportunities Fund.
Whilst the two pension funds are the anchor investors in the venture capital fund, investment has also been secured from an insurance company, a university endowment and a private foundation.
For the most part, institutional investment has eluded the cryptocurrency sector. At an institutional level, fund managers are conservative and not comfortable with investing in the nascent sector due to fears of market manipulation.
According to CoinMarketCap, the cryptocurrency market has a total market capitalization of $120 billion at the time of writing. In the context of investment classes generally, this is just a drop in the ocean. Gold has a market capitalization of approximately $100 trillion whilst the S&P500 has a market capitalization in the region of $22 trillion. It’s for this reason that cryptocurrencies are particularly susceptible to market manipulation.
Fund managers also have concerns with regard to regulatory compliance when it comes to cryptocurrency. Some clarity was achieved in 2018 with regard to regulation but regulatory frameworks are still incomplete. There are also security concerns with regard to the storage of digital assets amidst a backdrop of multiple cryptocurrency exchange hacks in recent times.
Given the cryptocurrency bear market which has been ongoing since January 2018, many in the sector have been awaiting an influx of institutional money to bring the market back into the green. In particular, many have been awaiting the approval of a Bitcoin exchange traded fund (ETF).
However, co-founder of Morgan Creek Digital, Anthony Pompliano took to Twitter to claim that through investment in his company’s digital asset based venture fund, institutional investment is already in play:
This morning our team at Morgan Creek Digital announced a new $40 million crypto venture fund anchored by two public pensions.
The institutions aren’t coming.
They’re already here. 🚀
— Pomp 🌪 (@APompliano) February 12, 2019
Pompliano founded Morgan Creek alongside Mark Yusko and Jason Williams, providing access to blockchain technology and digital assets to institutional clients as a global asset manager. A well-known figure in the industry, ‘The Pomp’ as he’s known in the industry, is influential in the space not just through his involvement with Morgan Creek Digital but also via his well regarded podcast, “Off The Chain”.
It’s clear that Pompliano has been working on securing pension fund investment for some time. Last Christmas Eve, he published a blog post titled “Every pension fund should buy Bitcoin”, setting out his rationale for pension funds to incorporate digital assets in their investment mix. Pompliano referred to the pensions crisis whereby many pension funds are unable to pay their future obligations. He makes the case for investment in Bitcoin on the basis that it’s a non-correlated asset and in this way, it minimizes risk as it doesn’t correlate with the S&P500.
Furthermore, he articulates that it has an asymmetric risk profile, with much more potential upside than downside in owning the asset.
Chief Investment Officer with Fairfax County Police Officer’s Retirement System, Katherine Molnar commented in Forbes on the investment:
“Blockchain technology is being applied in unique and compelling ways across multiple industries. We feel it is important to be opportunistic and are excited to participate in this emerging opportunity, due to the attractive asymmetric return profile that it represents.”
A small proportion of the fund will be invested in cryptocurrencies such as Bitcoin. Otherwise, Morgan Creek Digital will use the capital as seed funding for various crypto and blockchain related startups. The company has previously invested in Coinbase, Harbor and Bakkt. Last month, it participated in a funding round for tokenized real estate startup, RealBlocks, according to The Bitcoin Mag.