Uk Pension Crypto Investment: Is It Possible?

Investing pensions in cryptocurrencies is a highly contested issue. While some people argue that pension funds should not be allowed to invest in volatile and poorly regulated assets, others believe that it is not much different from investing in small-cap stocks or venture capital funds. The Financial Conduct Authority in the UK has outlawed direct investment of pension funds in cryptocurrencies, deeming the risks too high for the average investor. However, there are a few options for those who want to gain exposure to cryptocurrencies through their pension funds. One option is to set up a Small Self-Administered Scheme (SSAS), which allows individuals to become trustees and decide which investments the pension holds, including cryptocurrencies. Another option is to gain indirect exposure by investing in crypto-related companies or blockchain technology providers.

Investing in crypto through a SIPP

The Financial Conduct Authority (FCA) has deemed cryptocurrencies too risky for the average person, and in early 2020, made it illegal to include crypto-trackers in SIPPs. This means that you cannot buy cryptocurrencies directly through a SIPP, nor can you buy any of the available listed trackers.

However, there are a few workarounds. One way to get exposure to Bitcoin through a SIPP is to buy shares in companies that have Bitcoin on their balance sheet, such as MicroStrategy and Galaxy Digital Holdings. These companies offer shareholders indirect exposure to Bitcoin. For example, if you buy shares in MicroStrategy, you get a 28% Bitcoin exposure.

Another option is to use spread betting platforms to invest in Bitcoin tax-free in the UK. Spread betting is considered gambling, so any gains are tax-exempt. However, it is important to note that spread betting is a risky venture, as your position can be closed if the market moves, potentially resulting in losses.

Additionally, it may be possible to set up a Small Self-Administered Scheme (SSAS). This is a type of pension set up by an employer for a limited number of individuals, usually key owners or managers of the business. A SSAS allows members of the pension scheme to act as trustees and make decisions regarding investments, giving them the flexibility to invest in a wider range of options, including crypto.

It is important to note that investing in cryptocurrencies carries significant risks, including technology risks, liquidity risks, volatility risks, and counterparty risks. Before investing in crypto through a SIPP or any other means, it is essential to carefully consider and understand all the risks involved and ensure you are comfortable with them.

Pros and cons of crypto in a SIPP

In the UK, it is possible to invest your pension in cryptocurrency through a Self-Invested Personal Pension (SIPP). A SIPP is a type of pension that allows you to make your own investment decisions, including investing in crypto assets. However, there are several pros and cons to consider before investing your pension in cryptocurrency through a SIPP.

Pros of holding cryptocurrency in a SIPP:

• The rewards can outweigh the risks if the market is timed right. Cryptocurrency investments are unregulated, so you won't be subject to the same limitations as mainstream bank-backed investments.
• Cryptocurrency is supported by secure, decentralised blockchain technology, which is independent of traditional banking systems.
• Cryptocurrency trades 24/7, and market volatility can provide opportunities for greater returns.
• Cryptocurrency is not tied to a single currency or economy, so it can help investors beat inflation.
• Cryptocurrency provides accessibility and financial inclusion, allowing anyone with a smartphone and internet access to participate in the global financial system.

Cons of holding cryptocurrency in a SIPP:

• Cryptocurrency remains unregulated, and FCA regulation is vital for protecting your financial interests from high-risk ventures.
• Cryptocurrency investing is notoriously volatile, and holding crypto assets in a SIPP should only be considered by individuals who are comfortable with the risk and can afford potential losses.
• There are numerous elements of risk to consider when investing in cryptocurrency, including technology risks, liquidity risks, volatility risks, and counterparty risks.
• Cryptocurrency has not proven itself as a long-term investment, as it has only been around for just over a decade.
• Cryptocurrency has serious scalability issues, and it can be difficult to roll it out on a large scale due to capacity limitations.
• New investors in cryptocurrency are vulnerable to security risks, such as losing their private keys or falling victim to hacking or phishing attempts.

Legal issues for pension trustees

Investing in cryptocurrencies is a risky business, and pension trustees need to be aware of the legal issues and obstacles before making any decisions. Here are some key considerations for pension trustees:

• Power to Invest: Trustees should review their scheme rules and statutory powers to determine if they have the authority to invest in cryptocurrencies. As it is a new asset class, the rules may not explicitly permit crypto investments, and trustees may need to amend their rules with the employer's agreement to clarify their position.
• Acting in Members' Best Interests: Trustees have a fiduciary duty to act in the best financial interests of the members. They must seek written professional investment advice and consider the environmental, social, and governance impact of crypto investments, especially the energy-intensive "mining" process. Trustees should also ensure that crypto investments align with their policies, such as their statement of investment principles (SIP) and "integrated risk management" (IRM) policy.
• Regulated Markets: Pension investment regulations require trustees to predominantly invest in assets traded on regulated markets. As the cryptocurrency market is not yet regulated, trustees can only allocate a modest portion of their portfolio to direct crypto investments.
• Safe Custody: Trustees need to ensure the safe custody of any cryptocurrencies they purchase and decide who will hold the "private keys". Losing the private key means losing access to the cryptocurrency. Trustees may consider investing in a cryptocurrency fund or investment trust traded on a regulated market if a suitable custody solution cannot be found.
• Volatility and Risk: Cryptocurrencies are highly volatile and unregulated. Trustees must carefully consider the technology risks, liquidity risks, volatility risks, and counterparty risks associated with crypto investments. The Financial Conduct Authority (FCA) has warned that investing in crypto assets involves taking very high risks, and investors should be prepared to lose all their money.

While crypto investments offer the potential for significant returns, pension trustees must navigate these legal issues and carefully assess the risks before dipping their toes into the crypto market.

Indirect exposure to crypto

While direct investment in cryptocurrencies can be challenging due to their volatility, there are several indirect ways to gain exposure to the crypto market. Here are some options for indirect investment:

• Crypto Exchange-Traded Funds (ETFs): ETFs are investment funds that track the price of a single cryptocurrency or a group of cryptocurrencies. They allow you to invest in cryptocurrencies without actually holding the digital assets. Examples of crypto ETFs include the ProShares Bitcoin Strategy ETF (BITO), Grayscale Bitcoin Trust (GBTC), and Invesco Galaxy Bitcoin ETF (BTCO).
• Crypto Exchange-Traded Products (ETPs): ETPs are similar to ETFs but are governed by slightly different rules. They are financial instruments that track underlying securities, indices, or other financial products traded on exchanges. Examples of crypto ETPs include the Valkyrie Bitcoin Strategy ETF (BTF) and VanEck Bitcoin Strategy ETF (XBTF).
• Crypto and Blockchain Stocks: Instead of investing directly in cryptocurrencies, you can invest in companies that specialise in blockchain technology or hold cryptocurrencies on their balance sheets. Examples include Coinbase (COIN), Riot Blockchain (RIOT), and MicroStrategy.
• Crypto and Your 401(k): Some retirement plans, such as Fidelity's 401(k) accounts, allow you to invest a portion of your retirement funds in cryptocurrencies.
• Credit Card Rewards: Certain credit cards, such as the Gemini Credit Card and cards offered by Crypto.com and Coinbase, allow you to earn crypto rewards on your purchases.
• Crypto Mining: Instead of directly investing in cryptocurrencies, you can invest in companies that focus on cryptocurrency mining activity, such as Riot Blockchain, Hive Blockchain, and Marathon Patent Group.
• Staking: Staking is the process of locking up tokens to earn additional tokens as income. This can be done through decentralised finance (DeFi) platforms, where you lend your cryptocurrency to liquidity pools in return for more cryptocurrency.

Crypto as a high-risk investment

Cryptocurrency is a high-risk investment due to its volatile nature and lack of regulation. Crypto is not regulated like stocks or insured like real money in banks, and it is not issued or backed by any central or mainstream banking authority. This means that it is not subject to government-mandated policies, and there is no protection or insurance for lost or stolen cryptocurrencies.

The price of crypto is extremely volatile, changing quickly and frequently, with high highs and low lows. The lack of regulation also means that investors are not protected from high risks and could lose all their money. The Financial Conduct Authority has stated that "investing in cryptoassets … generally involves taking very high risks with investors' money".

Additionally, crypto is susceptible to scams and security risks. Investors need to be aware of the potential for scams and unsolicited offers, as well as the risks associated with storing crypto privately, such as losing private keys or having wallets corrupted by viruses.

Despite the risks, crypto has the potential for high returns and can be easily accessible to everyone, providing unrestricted access to their coins. However, it is crucial for investors to educate themselves about the risks and only invest if they are prepared to lose their entire investment.

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