Police officers and other state employees in Virginia’s Fairfax County will be looking forward to retirement with potential dividends from an unusual source: bitcoin.
Two separate pension funds that collectively manage $5.1 billion in assets for the state’s police force and other employees have joined a $40 million investment in the Morgan Creek Blockchain Opportunities Fund, which in addition to backing some of the best-known startups in the space, plans to invest in cryptocurrency.
Already, a portion of the $40 million has been invested in startups including Bakkt, the cryptocurrency exchange co-owned by Starbucks and the Intercontinental Exchange, which runs the New York Stock Exchange.
While the 2018 collapse in the price of bitcoin, the first application of blockchain technology, has scared away many would-be investors, the decision of two pension funds to back a slew of cryptocurrency and blockchain startups shows that others are looking to capitalize on the bear market.
“Blockchain technology is being applied in unique and compelling ways across multiple industries,” said Katherine Molnar, chief investment officer of Fairfax County’s police officer’s retirement system, in a statement. “We feel it is important to be opportunistic and are excited to participate in this emerging opportunity.”
In addition to Bakkt, the fund, created by Morgan Creek Digital in New York, is investing in cryptocurrency giant Coinbase, recently valued at $8 billion, and several lesser-known startups, including Blockfi, RealBlocks, TrustToken, Harbor, Open Finance Network, CityBlock Capital, Namebase, Good Money and Digital Assets Data. As much as $4 million of the investment could eventually be used to purchase cryptocurrency directly, though that has not happened yet.
While terms of the investment are not being disclosed other than that it is a special-purpose vehicle, meaning the investment will not come up in the startups’ capitalization tables, Morgan Creek Digital co-founder Anthony Pompliano says a “material amount of the fund is already invested.” Pompliano says his firm originally wanted to raise $25 million, but increased the round due to its popularity.
According to Molnar, the investment opportunity attracted her because of what she calls the “asymmetric return profile that it represents.” In other words, bitcoin and other cryptocurrencies have proved to be largely disconnected from global events, making them possible hedges to other more correlated assets, according to Pompliano.
“These are incredibly intelligent, long-term thinking, permanent capital allocators,” says Pompliano, who cofounded the fund with famed hedge fund investor Mark Yusko. “And so, they have a very different mindset than retail investors or some other capital allocators.”
The most recent County of Fairfax annual report shows that of the $6.7 billion invested in pension trust funds, $5.7 billion went to the police and employee funds, with the remainder going to a more general uniformed retirement fund. While the price of bitcoin dropped 83% in 2018, and currently sits at around $3,595, down from its all-time high of $19,000, supporters point to the $5.6 billion already invested in the space, according to CoinDesk data, to build out longer-term solutions for moving value with less reliance on banks.
Major Ed O’Carroll, commander of the Fairfax County’s major crimes bureau and elected trustee of the plan says he often shares investment plans with the officers he represents. The blockchain fund was no different, and he says feedback has been largely positive. “The members I have connected with within my plan are very supportive to have the investment team participate in this emerging opportunity,” O’Carroll says.
The Morgan Creek Blockchain Opportunity Fund marks an unusual fusion of traditional venture capital flowing into crypto and a new breed of companies aiming to use cryptocurrency to prepare for retirement. In spite of a warning from the Securities and Exchange Commission that some kinds of cryptocurrency IRAs are particularly ripe for fraud, one startup, Bitcoin IRA, says it has already processed $300 million in investments.
To combat potential fraud concerns, Pompliano worked with the pensions to answer questions they had about potential risks and how crypto investments differed from traditional assets. Going forward, he says the blockchain fund will continue to invest in cryptocurrencies and companies building infrastructures for a wide range of blockchain products, while pushing forward with the next stage of his project. Since March of 2018, he’s been raising a separate $500 million fund to invest in future tokens he expects will be created using blockchain to represent shares in everything from works of fine art to real estate.
“Our venture fund can invest in the companies that are issuing tokens,” says Pompliano. “We can invest in the equity of the exchanges where those tokens are being traded. But the big fund will purchase the tokens themselves.”