The Chinese Pension System
February 12, 2025
When a new investor enters into the cryptocurrency market, they are often confused by different quotes for what appears to be the same currency. For instance, Bitcoin and Bitcoin cash have different quoted prices and so do Ethereum and Ethereum classic. This can cause considerable confusion to the novice trader. However, with time and experience, […]
Zero-coupon bonds are those bonds that are sold at a deep discount to their face value. This means that these bonds do not receive any periodic interest. Instead, the investors have to invest a lump sum amount at the beginning of their investment and get paid a higher lumpsum amount at the end of their […]
A couple of years ago India as a country, was facing a huge divide. The government of India had passed a new legislation which would allow foreign direct investment into the retail sector. This meant that global economic giants like Wal-Mart, Tesco and Sears were on their way to open up stores in India. Needless […]
The Asian financial crisis was another major currency crisis that happened during the 1990’s. The crisis assumed epic proportions. This is because it started in only one country i.e. Thailand whose currency faced an attack from speculators. However, in a very short span of time the crisis had gripped the entire South East Asian region. […]
The purpose of commercial banking is to help corporations meet their funding needs in a better manner. Commercial banks help companies do this in several ways. One such way is related to the concept of reverse factoring. Reverse factoring is a solution that helps large corporations manage their supply chains better by helping optimize the […]
Pension funds typically cater to people investing for their retirement.
When it comes to retirement planning, most people stay conservative. Hence, pension funds were not allowed to invest in risky and unstable assets. However, the past decade or so has led to the creation of a new risky asset class.
For many years, cryptocurrencies have been considered to be an epitome of risk taking. However, now cryptocurrencies are the new kid on the block which investors cannot simply ignore.
The asset class has time and again proved its mettle by providing stellar returns to investors. However, these assets tend to be highly volatile. Hence, up until now, pension funds would simply steer clear of making an investment.
Pension funds have recently started making some investments in cryptocurrencies. Most pension funds are not investing more that 1% of their overall portfolio in the crypto asset class. However, given the fact that pension funds control trillions of dollars, even a small investment generates massive demand. The end result is a self-fulfilling prophecy.
Pension funds are increasing allocation in cryptocurrencies since they are providing better returns. Also, since they are providing better returns the allocation is being increased.
At the present moment, pension funds have a significant amount of cryptocurrency which they are directly holding on their balance sheet. Even though, the allocations are small, the impact on cryptocurrencies is huge.
The fact that conservative investors such as pension funds are showing confidence in cryptocurrencies can be considered to be a milestone for these financial instruments. They were once considered a speculative fad which would die down on its own. Investment by pension funds sends a message to the investment community that cryptocurrencies are here to stay for the long run!
It needs to be noted that there are clear and obvious geographical trends when it comes to investment that has been made by pension funds in cryptocurrencies.
Pension funds belonging to the developed world are making significant investments in the cryptocurrency world. This is because regulators in these countries have given a tacit approval to their funds to make such investments.
On the other hand, the regulations are still quite strict in the developing nations and hence pension funds in the developing world are not investing in the crypto market at all.
There are several pension funds who are not comfortable making direct investments in cryptocurrencies. Hence, they are using the indirect route. These pension funds build crypto positions by investing heavily in stocks which have a large exposure to cryptocurrency.
Stocks like Tesla and Coinbase have been used by many pension funds for this purpose. This is because investment in equity does not count as an investment in alternative assets. Hence, if a pension fund buys stocks of Coinbase, they are not subject to the same regulation that they would have been in case they invested directly in cryptocurrencies.
The cryptocurrency market has been in a remarkable bull run in the past couple of years. The end result is that the staunchest opponents of cryptocurrencies have also been won over. However, that does not mean that the risks associated with cryptocurrencies don’t exist any longer.
Some of the important risks have been mentioned below:
Many people investing in pension funds do not have the time to stay invested for long periods of time. Also, they do not have the risk appetite because this may be their only source of income during retirement.
For example, in India, cryptocurrency investors have to pay a goods and service tax which can be as high as 28%! In many countries, losses from crypto investments cannot be offset with profits made in other investments. The fact that taxation rules keep on changing on a frequent basis also makes this asset class unpredictable and discourages people from making investments.
In case of other asset classes, there are centralized custodian agencies which have been approved by pension fund regulators. However, when it comes to cryptocurrency assets, there are no fixed regulators.
There are various private entities who provide custodian services. However, very few are actually reliable. This is the reason that pension funds find it difficult to store cryptocurrency after they have made a purchase from the open market.
The fact of the matter is that cryptocurrencies have now become mainstream. As a result, even conservative investors like pension funds cannot afford to ignore them. However, there are still quite a few risks associated with cryptocurrencies which cannot be ignored.
Your email address will not be published. Required fields are marked *