In July, U.S. Senator Cynthia Lummis of Wyoming addressed the Bitcoin2024 Conference. The Senator announced a plan for the United States to establish a Strategic Bitcoin Reserve, framing it as the “Louisiana Purchase” of the 21st century. Days later, she introduced the Bitcoin Act of 2024, directing the United States Treasury to purchase 1,000,000 Bitcoin (approximately 5 percent of global supply), to “fortify the dollar against inflation” and to “cement U.S. leadership in the rapidly evolving global financial system.” Like gold and petroleum, Sen. Lummis views bitcoin as a hard asset critical to American security. The Strategic Bitcoin Reserve is designed to be held for at least 20 years and may be used only to repay national debt.
Since Sen. Lummis’s announcement, the Strategic Bitcoin Reserve has been endorsed by elected officials across the political spectrum. Democratic Representative Ro Khanna of California, said that “being against Bitcoin is like being against cell phones, AI, and laptops… I don’t want all that value and wealth being made outside the United States, I want the United States to be part of that wealth generation.”
Institutional investors have taken notice of the growing political momentum. State of Wisconsin Investment Board, State of Michigan Retirement System, and Houston Firefighters have made investments, albeit in relatively small sizes. SWIB has invested $162 million, Houston $25 million, and SMRS $6 million.
The small allocations are likely driven by Bitcoin’s dramatic volatility — with institutional governance structures not easily adapted to this range of price movements. On the upside, many plans have guidelines that require them to trim positions when they become too big. On the downside, plans are loathe to absorb such sudden mark-to-market losses.
This caution is understandable. Take an investor who bought Bitcoin with a one-year hold period on any random day over the last 12 years. Of the 4,000 days in the period, more than 900 resulted in a drawdown over 13 percent. Almost 200 produced drawdowns worse than 65 percent. Still, these negative returns are short-lived.
Analyzing the same twelve-year period since 2012, if an investor had bought and held Bitcoin for four years instead of one, the investment would have generated a positive return no matter when they made the allocation. More than half of the approximately 2,850 distinct four-year hold periods exhibited CAGRs above 91 percent, while the worst period produced a 23 percent CAGR.
The most important consideration is to adopt an approach that facilitates a medium- to long-term hold period without getting chopped out of the position due to short term volatility.
In comparison, other assets don’t hold a candle to Bitcoin’s long-term performance — not gold, not silver, not the S&P 500. Remarkably, the 95th percentile of performance for a four-year hold period for each of these assets underperformed the 5th percentile four-year hold period for Bitcoin.
Bitcoin as an asset offers a rich and multifaceted ecosystem of information to anyone who takes the time to look deeper. But considering Bitcoin’s price volatility, no matter how positive the view, it is rational for institutions to ask how to allocate in a way that is prudent and strategic —and compatible with their governance requirements and plan objectives. A simplistic approach is to just buy Bitcoin, hold on through the volatility, and see what happens. This approach may be a starting point, but it is challenging to allocate meaningful capital without a clear investment strategy.
But what if Bitcoin could be employed more strategically to improve existing risk-return profiles? For instance, investors can integrate it into existing allocations by sizing Bitcoin exposure with clear duration targets, customizing a strategy to match their specific liability structure. This approach solves for downside risk mitigation and upside participation, while potentially improving risk-adjusted returns across sector allocations and liquidity profiles.
Take credit as a case in point: instead of loading up on risky, illiquid bets with significant leverage, investors can instead combine high-quality credit with a tactical allocation to Bitcoin. The credit generates current income while its duration provides investors the means to express a long-term view on the combined investment. Even if Bitcoin were to repeat its worst historical four-year period, a combination of lower yielding high-quality credit plus a little Bitcoin would outperform a 100 percent allocation to riskier, potentially higher-yielding investments. Properly sized, the combination forms a cornerstone for improved funding ratios.
It also takes pressure off allocators by steering investors away from complex and risky investments. Instead of swinging for the fences with racy exposures in credit and alternatives, investment professionals can focus their energy on investments with much better risk-adjusted returns. This approach is made possible through an understanding of Bitcoin’s uses and an informed underwriting view on its long-term CAGRs.
Plans must act soon . More than a decade of ultra-low interest rates, loose monetary policy, and bailouts have pushed excessive liquidity to every corner of the economy. In September, the Fed commenced interest rate cuts and reiterated forward guidance of several additional cuts over the coming months. Taken as a whole, the factors that drive inflation are accelerating again, and starting from an already elevated base.
Perhaps no segment of institutional portfolios will be more severely impacted by inflation than fixed income, which is ironically considered “low risk.” Even with a below-trend monetary depreciation rate of 7 percent going forward, a par repayment for ten-year credit is worth just 50 percent in today’s dollars. Even assuming no defaults due to credit risk, the fact that approximately 25 percent of U.S. pension assets are allocated to fixed income implies a 12.5 percent real loss of total assets. This is the biggest risk confronting pensions today: inflation relentlessly erodes the real value of fixed income assets and further destabilizes an already fragile and underfunded system.
Value-added bitcoin investment strategies—underwritten to the low end of its long-term historical returns—can reshape and improve the increasingly dangerous risk profile of credit and alternatives. Addressing the inflation question is the most pressing challenge confronting allocators today—and getting it right is existential for pension beneficiaries across every state and every industry. For everyone’s sake, let’s follow Senator Lummis’s lead, take the time to look into Bitcoin and determine how to prudently employ it as a tool to fortify institutional investors against the many perils of inflation.
Andrew Hohns is CEO of Newmarket Capital
