Bitcoin and Superannuation

Bitcoin presents both opportunities and challenges for traditional investment strategies, particularly within the superannuation industry. This industry, crucial for securing the financial futures of millions, operates within a tightly regulated framework designed to safeguard retirement savings while fostering stability and consistent performance.

However, this regulatory environment and the inherent investment philosophy it encourages—geared towards risk aversion and a preference for traditional asset diversification is at odds with the benefits offered by Bitcoin, especially when considering the asset's long-term investment horizon.

This article will cover two important topics:

1. Why the traditional Superannuation industry is averse to Bitcoin.
2. Why a "balanced portfolio" isn't the panacea it's made out to be.

The Regulatory and Investment Strategy Dilemma

Super funds are bound by regulations that incentivise conformity and moderate risk-taking, primarily to protect investors from the potentially detrimental effects of excessive volatility. A significant aspect of this regulatory framework is the requirement for funds to perform within a specific range relative to their peers and the broader market.

The 2023 Annual Superannuation Performance Test results can be found here on the APRA website.

For all failed trustee-directed products, licensees to:

• Write to members by Thursday 28 September 2023 advising them of their performance test outcome. 

• Understand the drivers of performance test outcomes, and develop and implement a rectification plan, where appropriate. 

• Assess the potential implications of trustee-directed products and MySuper products (if any) failing the test on the fund, including the sustainability of business operations.

• Consider whether the transfer of members to another product or fund would be in members’ best financial interests.

As you can see from the above this creates a scenario where funds are disincentivised from making high-risk, high-reward investments, such as allocating to Bitcoin, due to its pronounced price volatility and the risk of underperformance in downturn years.

Bitcoin's price volatility, characterised by cycles of sharp increases followed by significant retractions, poses a regulatory risk for super funds. Such volatility could lead to underperformance penalties, forcing funds to eschew Bitcoin despite its potential for high returns over a longer investment horizon.

This situation highlights a fundamental conflict: the super industry's short-term, high time preference investment strategy of self preservation versus what should be required for your retirement savings, and inherently long-term, low time preference approach, something for which Bitcoin is the perfect asset..

The Case for a Long-Term Bitcoin Allocation

Despite these challenges, Bitcoin presents a compelling case for inclusion in superannuation portfolios, particularly from a long-term investment perspective. Historical data, as highlighted by analysts like Willy Woo, underscores Bitcoin's exceptional performance over four-year holding periods, consistently yielding returns that outpace traditional investments like the S&P 500, real estate, and venture capital funds.

This performance demonstrates Bitcoin's potential as a low time preference asset, ideal for the long-term investment horizon of superannuation funds.

Moreover, the traditional 60/40 diversification model is showing signs of strain, particularly in the wake of a decades-long bull market in bonds and increasing concentration risks within equity markets. This scenario underscores the limitations of traditional diversification strategies and highlights the need for a paradigm shift towards assets like Bitcoin, which can offer genuine diversification benefits due to their non-correlated nature with traditional assets.

Rethinking Diversification and Embracing Bitcoin

Incorporating Bitcoin into superannuation portfolios requires a departure from traditional diversification beliefs. A more concentrated allocation to Bitcoin, especially during the accumulation phase of super, can significantly enhance retirement outcomes.

Bitcoin's unique characteristics, its fixed supply, decentralisation, and role as a digital store of value—make it a potent hedge against inflation and currency devaluation, increasingly relevant in today's economic environment.

This strategy does not advocate for a wholesale replacement of traditional assets but suggests a more balanced approach to portfolio construction. It recognises the changing dynamics of the financial markets and the limitations of past strategies, advocating for the inclusion of Bitcoin to achieve meaningful diversification and potential for substantial long-term growth.

Conclusion

As the financial landscape continues to evolve, so too must the strategies employed by the superannuation industry and individual investors. The traditional super industry's hesitancy towards Bitcoin, rooted in regulatory constraints and a high time preference investment philosophy, contrasts sharply with Bitcoin's low time preference, long-term growth potential.

By reevaluating the role of Bitcoin in retirement portfolios, there's an opportunity to navigate the uncertainties of the future with a strategy that leverages the unparalleled potential of Bitcoin, ensuring a more prosperous and secure retirement for millions.

To learn more about moving your Superannuation into and Self Managed Super Fund and Collaborative Custody Bitcoin you can visit our information site https://www.bitcoinsuper.io/ there you will find all the information you need including a setup guide.

You can book a meeting with Andy below, who will be happy to answer any questions and help you unlock the potential of your superannuation.