In this opinion piece, Rupert Carlyon, founder and Managing Director of KiwiSaver provider Kōura, says while investing in cryptocurrency is polarising, he argues that with the right mitigation strategies in place, those who do invest won’t put their retirement savings at risk.
Is it an appropriate option for KiwiSaver investors?
Bitcoin is on the rise again, reaching a new high of $US72,000 as of March 11, 2024. With the increase in price comes further debates regarding Bitcoin’s legitimacy as an asset and investment class.
Kōura was the first KiwiSaver provider to offer a cryptocurrency fund to KiwiSaver investors and we understand cryptocurrency remains deeply polarising. People either think it is the future of money or rat poison, there are very few people in the middle.
Are we putting retirement savings at risk? All investments carry risk, but because of the structures we have put in place, Kōura help manage some of this risk and investors are educated on these before investing .
For a long time, the traditional finance industry told people they should stay away from this unregulated wild west area of finance.
There was, and still is, very good reason for this. The asset class is unproven, has an uncertain future, is highly volatile, and has historically been very difficult to invest in without exposing yourself to fraud.
This all changed when the Securities and Exchange Commission (SEC) approved 11 new Bitcoin Exchange-Traded Funds (ETFs). These funds will purchase Bitcoin for their unit holders and investors can purchase those units on the New York Stock Exchange in the exact same way that investors can purchase a traditional equity. This makes it safe and easy to purchase Bitcoin in a regulated structure.
Further evidence of traditional finance’s embrace of Bitcoin was the recent announcement from Blackrock; that it will potentially include Bitcoin (via these funds) in its Global Allocation Fund as well as Fidelity’s inclusion of Bitcoin in its retirement account options.
Commentators are now saying that Bitcoin is becoming too big to ignore. Overall, the narrative is changing.
Back in May 2023, Kōura launched KiwiSaver’s very first Cryptocurrency fund. As you would expect from such a polarised asset class, this was met with both celebration and outrage. Some people thought it was amazing that we were finally allowing people to invest in this emerging asset class while others thought it was irresponsible to invest retirement savings into an unproven and highly volatile asset class.
Both sides completely missed the point. No one knows whether Bitcoin is heading for the moon or will shortly be exposed as the emperor with no clothes. Our job as leaders in the financial sector is to provide investors with appropriate investment options, educate them on the implications of their decisions and provide guard rails to ensure that they don’t put their objectives at risk.
Investing is always about risk and, most importantly, how you manage that risk. Cryptocurrency is no different to that.
In approving a Bitcoin fund (and answering the question of whether it was appropriate for KiwiSaver accounts), the job of the Kōura Investment Committee was to determine whether appropriate risk mitigation strategies could be put in place to ensure that it does not put people’s retirements at risk.
We do this through three mechanics, limited investment size, rebalancing and appropriate warnings / education. Firstly – an appropriate investment size. If people choose to invest into the Kōura’s Carbon Neutral Cryptocurrency Fund, our recommendation is for people to only invest 3 per cent of their portfolio in this fund, a number that portfolio theory suggests is the optimal allocation.
If people want to go higher, they can increase their allocation to a maximum of 10 per cent of their KiwiSaver portfolio. This range is sufficient to give people material upside for their KiwiSaver balances, but not sufficient to put their entire retirement savings at risk.
Secondly, while very unpopular with the Crypto die-hards, we have a portfolio rebalancing process. This means that we regularly transfer the gains (or losses) from our clients’ Carbon Neutral Cryptocurrency Fund, into their other funds. This rebalancing process occurs automatically every six months or if their Carbon Neutral Cryptocurrency Fund reaches 15 per cent of their KiwiSaver portfolio.
When one of these two situations occurs (whichever comes first), we rebalance our clients’ portfolios back to their chosen allocation. Over the past 12 months, as Bitcoin has risen, we have continued to take gains from this fund and allocate them into their other funds, effectively cashing in the gains.
Thirdly, we make sure that only those clients who really want Bitcoin end up investing in it. Before investing, clients are given at least three separate warnings that emphasise the high-risk and volatile nature of the asset class to ensure that they still want to invest into the fund.
One third of our customers have chosen to be members of the Carbon Neutral Cryptocurrency Fund and nearly 70 per cent of new customers are participating in that fund. Most members are limiting their investment in the cryptocurrency fund to just 3.5 per cent of their overall portfolio.
New members range from 20 to 50-year-olds and range from people with small balances to one of our members who put 10 per cent of $1m into cryptocurrency.
There is no question, we have been lucky with the recent rise of Bitcoin and our fund has performed extremely well. Will that continue? Who knows. There will be a Crypto crash, it is only a matter of time, and I cannot confidently tell you if the next one will be terminal. Bitcoin’s future is by no means certain.
But I am confident that Bitcoin is not going to put our members’ retirements at risk thanks to the structures that we have put in place to protect investors.
This commentary is general information only and is not financial advice – it is always a good idea to seek professional advice for your personal circumstances. Cryptocurrency is not appropriate for everyone and carries a significantly higher level of risk than a traditional financial asset. Before investing it is crucial that you have a clear understanding of all the associated risks, which are available on the Kōura Wealth website.
For more information click here.