Michigan Retirement System Has $6.6 Million Invested in Bitcoin

Retirement doesn’t just come with a nice beach, some golf, and some Bitcoin.

Wait a minute, what?

Investors who oversee parts of Michigan’s massive public pension system are dipping their toes into the water when it comes to cryptocurrency. While the current amount of money allocated to bitcoin and other popular currencies is relatively small, it’s still a sign that the Michigan State Retirement System is ready to go where many other similar funds haven’t.

The Michigan State Retirement System has about $6.6 million invested in Bitcoin, a state treasurer said.

As of the end of July, the Michigan State Retirement System had invested about $6.6 million in bitcoin, the best-known form of cryptocurrency, said Ron Leix, a spokesman for the state treasury. The fund also invested $1.4 million in the Grayscale ethereum ETF, he said. Ethereum is another of the most popular digital currencies.

But that masks a larger movement: Leix confirmed that the fund has invested about $45 million in cryptocurrencies over the past two years. The dividends are striking: Leix said the state has already recouped its initial investment and made an additional $39 million from crypto alone. In crypto parlance, Michigan’s assets are going “to the moon.”

Investors have poured about $20 million of that return into the fund, Leix said.

But the investments represent exceptionally small portions of the $107.5 billion total fund. And despite any gains, there’s no pressure right now to dig deeper.

“Cryptocurrency does not play a significant role in our investments,” Leix said, noting that a private company hired to invest part of the fund makes crypto decisions.

“There is no active strategy for investing in Bitcoin and cryptocurrencies.”

The company behind these picks, an investment management firm called ARK Invests, argues that cryptocurrencies offer a “new paradigm” for how people and economies use money.

“ARK believes that cryptocurrencies will contribute to the evolution of monetary systems more dramatically and profoundly than any other breakthrough in history,” reads a section of the company’s website explaining its cryptocurrency strategy.

Experts told the Free Press about the inherent risks of investing in cryptocurrencies. And except for a few outliers — notably Wisconsin’s pension fund, which announced a much larger investment in crypto earlier this year — cryptocurrency investments appear to be rare among large funds of this caliber.

Wilshire Associates, the Detroit Police and Fire Retirement System’s outside financial advisor, said it has been preparing white papers on Bitcoin and cryptocurrencies for several years and does not advise retirement systems to invest money in the space. Detroit Police and Fire Retirement System spokesman Bruce Babiarz said:

Babiarz said the city’s police and fire pension fund has not invested in any cryptocurrencies.

The police and fire retirement system’s board of directors oversees the $2.7 billion fund, which serves about 8,000 retired police and fire retirees and about 3,000 active-duty first responders.

The rapid rise in recession concerns in early August led to a sell-off in cryptocurrencies as well as stocks.

Bitcoin and Ethereum fell in trading on Monday, hitting lows not seen in months. Bitcoin fell 12% to $52,054, according to Reuters, on track for its biggest daily drop since November 2022. Ethereum fell as much as 21%, hitting its lowest level since January. Reuters reported on Monday morning that bitcoin has lost more than a third of its value since reaching a record high in March.

Analysts noted that cryptocurrencies are increasingly trading in a similar direction to stocks, disproving the previous theory that cryptocurrencies could be seen as a “safe haven” for investors in times of uncertainty.

We will see what else we will see in the coming days if recession fears continue.

Cryptocurrency markets have seen a surge of interest from traditional investors this year after the U.S. Securities and Exchange Commission approved exchange-traded funds to track spot prices of Bitcoin and Ethereum.

Scott Baker, an associate professor of finance at Northwestern University, explained that currencies are in a very different place now than they were a few years ago, as they are increasingly becoming part of traditional retirement and investment portfolios.

“I think there’s a straw man out there… Everyone who invests in crypto is either some kind of crazy person, some tech enthusiast, or some people who have put their entire government savings into crypto,” says Baker, who has authored numerous articles investigating who is investing in crypto and what they’re doing with their earnings.

“What we saw was that … the average crypto investor is actually very active in traditional equity markets as well.”

Are you confused?

What are we talking about?

Cryptocurrencies are a form of digital money that is largely unregulated and rarely used in everyday transactions that most people think of when they think about how to use money. While new cryptocurrencies emerge regularly, bitcoin tends to get the most attention and is generally considered one of the more stable currencies.

However, the lack of regulation, combined with the mysterious nature of bitcoin and similar funds, makes cryptocurrencies potentially very risky — or rewarding — investments, said Gina Pieters, an economics professor at the University of Chicago who studies cryptocurrencies.

“The tricky part about bitcoin as an asset is calculating its price trajectory. Unlike stocks or bonds, there are no underlying assets to price — its value comes from buying or selling the product (bitcoin) itself, which is used only within its own ecosystem (people don’t use it to make payments). It increases as more people adopt bitcoin, and decreases otherwise,” Pieters said in an email exchange with the Free Press.

“The returns on cryptocurrencies (when they’re good) are much higher than any traditional instrument. Of course, when the returns are bad, they’re more extreme — the value of various coins drops to zero.”

Pieters noted that bitcoin is unlikely to bottom at this point, but it is certainly common to see huge swings in its value. Towards the end of 2021, one bitcoin was valued at more than $64,000. A year later, it was closer to $16,500.

Leix noted that there are “risk controls” for the state pension fund. The way he put it is, the more money there is, the more controls there are.

“Risk is limited by a) the amount each manager is given to invest and b) how much can be invested in a given sector or a given company. We review funds for reasonableness and whether they fit the strategy they were entrusted with. Risk controls are in place,” Leix said in an email.

Pieters said that investing in cryptocurrencies, like any other investment, depends on evaluating risk and return.

“Whether this is appropriate for a retirement fund or what fraction is appropriate is something that depends on the guidelines of the particular fund,” he said.

Who invests in cryptocurrencies?

Baker said that currently, 15% to 20% of the U.S. population has invested in crypto or has done so in the past. And that number may be soft due to the lack of robust reporting requirements.

He and others examined transactions on Coinbase, one of the largest cryptocurrency exchanges, to gain insight into the situation of the average crypto investor.

They found that this largely reflects the attitudes of more mainstream investors, that is, people who have higher than average incomes, are more comfortable with risk, and already invest frequently using traditional methods.

Many people view it as an investment in their investment portfolio. “As financial professionals, we teach students that they want to diversify their portfolio,” he said.

“They are still investing in traditional stock accounts, but they are also putting some money into crypto.”

He and many others say that if someone wants to buy crypto, it probably makes sense for everyone to invest “a small portion” of their available money. This will vary for each person, of course, but it generally provides protection against market volatility.

Baker also found that crypto investors treat their gains like any other investment: They often leave the money invested.

“So when people win the lottery, they spend a tremendous amount of it. Or if they get a stimulus check, they spend a pretty big chunk of it up front. If they see gains in their crypto accounts or their stock accounts, they spend a much smaller portion of it,” he said.

What impact will this have on Michigan retirement benefits?

Today — very little. Tomorrow? Who knows.

This is new territory for large, traditional investors. Both proponents and opponents are calling for congressional action: Supporters of the currencies say the legislation could normalize investment and increase the number of people investing. Critics — led by the chairman of the U.S. Securities and Exchange Commission — argue that cryptocurrency markets are prone to widespread fraud and need significant regulation.

So how will all of this affect Michigan retirees, at least those who rely on income from Michigan’s public pension fund?

As Leix noted, the amount currently invested in crypto is so small that even losing money every day would be a relatively small blip on the fund’s radar. He also pointed to a 2023 Yale University analysis that found Michigan’s fund had the second-best returns among similar funds in other states over the past five-year period.

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