Alaska Permanent Fund Corporation (APFC), the $84 billion sovereign wealth fund, currently has less than 1 per cent of its portfolio invested in cryptocurrency-related investments. But the positive returns from the small allocation and tailwind from US policymakers are creating enthusiasm to explore what a larger allocation could bring to the portfolio.
The permanent fund has a total $9 million public market exposure to cryptocurrency investments, said chief investment officer Marcus Frampton, speaking during the annual board of trustees meeting in Anchorage.
Frampton said the return on the investments has been positive, largely driven by a handful of high performers like a stake in crypto exchange Coinbase, and various Bitcoin miners like MARA Holdings and CleanSpark. Exposure to the emerging Bitcoin treasury model, whereby companies hold Bitcoin as part of their corporate treasury reserves, via an allocation to a software company and a Bitcoin holding company MicroStrategy, also sits in the allocation.
In private markets, one of the best-performing allocations has come via venture capital, where APFC has invested around $30 million – and earned an 8.5 x multiple, including $81 million of cash distributions. High returns came from initial venture stakes in Coinbase and Circle, he said. “The current exposure is around $90 million, of which Circle, recently gone public, accounts for the bulk,” said Frampton.
However, he noted losers amongst the winners, like defunct crypto exchange FTX in which APFC lost “a couple of million.”
Elsewhere, exposure to digital assets comes via private infrastructure where APFC is invested in data centres and power, a sector that is benefiting from demand for electricity.
Frampton explained that the returns and volatility in Bitcoin have reduced in recent years.
Since 2010, the currency has experienced five drawdowns of over 70 per cent, with the most recent being between November 2021 and November 2022 when Bitcoin’s value declined by 77 per cent. Yet between July 2010 and December 2021, the currency has delivered a staggering 220 per cent annualised return, with an annualised volatility of 140 per cent.
Citing research from Goldman Sachs, Frampton said the last ten years are unlikely to be repeated. Bitcoin’s market capitalisation would need to rise from less than 2 per cent of the global money supply today to 47 per cent by 2034 for that to happen. However, he said an annualised total return of 10 per cent is possible.
“If Bitcoin delivered an annualised total return of 10 per cent over the next decade, it would imply that Bitcoin’s market capitalisation would be equivalent to around 2.5 per cent of the global money supply in 10 years which seems more plausible in our view,” he said.
“Goldman says for most institutional investors, it’s [Bitcoin] not recommended. But by saying ‘most,’ they’ve left the door open; they are not saying it’s not recommended for all institutional investors.”
Risks ahead
Because it is a new asset class, it is difficult to ascertain how quickly liquidity could dry up in a drawdown. Rebalancing risk is another concern. “I think it’s fairly liquid, but one of the issues is that it hasn’t been around that long. Although I suppose for rebalancing you’d be buying in a drawdown,” reflected Frampton.
Another unknown remains around how to classify crypto investment. “Is it an asset class like a commodity or security, or is it a form of fiat currency because crypto has attributes of both?” he said.
Commodities are traded on commodity markets, and the Commodity Futures Trading Commission (CFTC) has classified Bitcoin and Ethereum as commodities, meaning they can be traded on commodity futures exchanges like the Chicago Mercantile Exchange. Yet bitcoin has fiat currency characteristics as well, and a couple of countries are adopting it as an alternative currency, so it can be viewed as a unit of account and store of value too.
“The fuzziness in its classification may be one of the biggest risks and regulatory frameworks are still evolving,” said Sebastian Vadakumcherry, chief risk and compliance officer at APFC.
Although the GENIUS Act has created more regulatory certainty, a change in administration could turn the clock back. Moreover, trustees discussed the high chance that governments will generally be uneasy about crypto taking over as money because they like to have the ability to expand or contract the money supply as they see fit.
Investors at the meeting also have other concerns. If cryptos don’t operate as fiat currencies, how is their intrinsic value discerned? The likelihood of new “crypto” being mine or developed is not low and the question of how investors would differentiate and pick “winners” remains.
Returns are also difficult to forecast. Unlike other stores of value like gold which have years of history for investors to chart to help plot the future, the data isn’t available.
“We all think there is a lot of potential, but we have to be cautious. All asset classes have risk and we are in the business of taking risk, but we have to be mindful,” said Vadakumcherry.
Other areas of risk include unknown correlations to inflation and equities, which makes asset allocation modelling challenging. Finally, trustees heard that investors who plough in, also face reputational risk if the sector fizzles out.
