Warren Buffett called it rat poison. Famed economist Nouriel Roubini was more direct (and vulgar), calling it “sh*tcoin.” With heavy-hitters reacting so strongly, why would anyone consider Bitcoin a retirement asset for their investment portfolio, let alone a 401k or similar retirement plan?
Many reasons, according to SkyBridge Capital’s Anthony Scaramucci. While acknowledging its controversial past and present, the future is crypto, with Elon Musk’s multi-billion-dollar Bitcoin bet giving a big boost to Scaramucci’s argument.
We know tomorrow’s 401k participants won’t necessarily like or want yesterday’s investment options, but how far should plan sponsors go in offering the hot, new thing? It’s a difficult question. Fiduciary is front and center, and drives the conservative, almost patriarchal, approach that employers and advisors take when constructing 401k investment menus.
Indeed, many older 401k advisors have a moral aversion to offering Bitcoin, cannabis stocks, and similar offerings. But will a fiduciary issue eventually arise from not offering such investments? If the returns are there, would it be a disservice by advisors and sponsors to ignore such investments simply because of personal bias?
We can table these questions for now. Most 401k target demos are nowhere near comfortable enough to consider Bitcoin for their company’s retirement plan. But with BlackRock, Fidelity, and other large retirement asset managers flooding the space, as well as university endowments and hedge funds, it will be answered eventually—and perennial salesman Scaramucci makes a strong case for understanding its potential early on.
The RIA/pundit/political insider, who the New York Post called one of the city’s top power brokers, has what he calls a ‘Big Dog’ in the hunt. He launched the SkyBridge Bitcoin Fund in December, with the currency stored at Fidelity Digital Assets. In March, he filed to create a Bitcoin ETF, partnering with First Trust Advisors in the endeavor. And it just so happened that at the time of the December launch, Bitcoin skyrocketed, breaking the $28,000 mark on its way to $61,000 roughly three months later (although fallen sharply since).
It made us—and everyone—wonder if he’s lucky or good.
“I’m old enough to know that a lot of things in life are providential,” Scaramucci humbly replied. “I don’t want to use a cliché, but I’d rather be lucky than good. I would say we’re lucky on this, but that luck is born of hard work.”
Reflecting on his brief stint in the Trump Administration (11 days or “one Scaramucci” as he’s fond of tweeting) and four years of what he called political nonsense, he also noted SkyBridge’s March 2020 COVID-driven debacle, its worst March ever. Returns declined 24%, but SkyBridge finished the rough year down only about 6.7%; not bad for a noncorrelated, alterative investment fund-of-funds.
“We’re working super hard, and I sort of feel like we deserved a break,” he said. “I think the timing is lucky, but the analysis is quite sharp.
“I give us credit for a bold decision,” Brett Messing added, a fellow Goldman alum and the firm’s President and COO. “We could have just as easily bought it and spent a year sloshing around; up 30%, down 30%, but not really going anywhere. Instead, we bought it, and these events unfolded. I’ve always said that every great success has three components—brains, hard work, and luck. The timing was pure luck.”
A scrappy New Yorker known for addressing criticism head-on, Scaramucci did just that, making an argument for Bitcoin in general before turning to 401ks specifically. He was well-prepared, beginning philosophically by paraphrasing Musk and historian Niall Ferguson to explain that money is merely a representation of value.
“If I have $200,000 worth of digits in a bank account, I can wire them electronically to the Mercedes-Benz dealership, and a [G-Class SUV] shows up in my driveway,” he said, using a relatable example we also had in mind. “But what am I sending them exactly?”
Money is simply bartering technology, moving from seashells to silver coins, paper to electronic digits, and now Bitcoin, the latest innovation. He added that technology is rarely a loser before explaining it this way:
“Let’s say we were talking about Amazon 12 years after its inception. It’s 2009, and I said I’m buying a big chunk of its stock. You say, ‘Well, Amazon’s run up a lot. Why are you buying Amazon? They don’t make money. It’s not a profitable company.’ I would say, ‘OK, I agree, but it’s experiencing Metcalfe’s Law [a telecommunication term that finds a network is proportional to the square of the number of connected users].’ If we ultimately decided not to buy it, we would have made a big mistake because, in the ensuing 12 years, Amazon went up 64 times.”
Or, more succinctly, a $10,000 investment then would yield $21 million today.
His point? Bitcoin is the latest technological frontier—a monetary network in the same way that Amazon is a retail network, Google a search network, and Facebook a social network. And it’s decentralized, as opposed to the near-monopoly the others enjoy in their space. It makes it even more compelling “because nobody has control of it. The result is millions of people that are involved, hundreds of thousands of nodes, and I take a lot of comfort in that.”
It also checks several boxes that make it something real and tangible, at least from a historical standpoint. The first is having trust in the network. The New York Digital Investment Group (NYDIG) reported 25.6 million addresses held Bitcoin in November 2020, a record number at the time.
The integrity of the transfer is next, “that what you’re transferring to me is only transferred to me, and there’s no double spend. The banking system has done a very good job with that, and through decentralization, Bitcoin has as well.”
The third box is the number of users, and the price of Bitcoin can be tracked by the exponential growth of its user network.
“If I gave you a Bitcoin chart and said, ‘Here’s what it was worth in 2009 and how many people had them, and here’s what the coins were worth in 2013 and how many people had them,’ you could see the coin’s rise in value pursuant to the scale of that network. And then, of course, you also have these meta factors, like the money-printing that’s going on in the United States and elsewhere.”
It’s one reason for his bold prediction that Bitcoin will top $100,000 by year’s end, an estimate he claimed was actually conservative. SkyBridge analysts believe 225 million people will be part of the Bitcoin monetary network by the end of 2021, which will therefore reflect between $125,000 and $150,000 per coin.
It’s simple supply and demand. That major countries like China and India, and Nigeria, to a lesser degree, are banning Bitcoin was spun as a positive, with Scaramucci mentioning black market economics as another reason for its rise. He then did a bit of back-of-the-envelope math.
“It didn’t work with Prohibition, and it won’t work now. We’re 12 years into it, and it’s growing exponentially and taking full advantage of Metcalfe’s law. You’ve [got] 21 million bitcoins and 48 million global millionaires. You don’t even have enough coins for every millionaire to own one coin each, so this thing will trade to much higher levels due to the scarcity factor.”
But is it appropriate for a 401k?
His response was somewhat contrarian, not unheard of for Scaramucci. Participants need enough alpha to keep pace with inflation and ensure solid accumulation, but investment menus tend to lean conservative, believing slow and steady over a 30-year or 40-year time horizon will win the retirement race. Plan sponsors, therefore, avoid hyper-volatility in the products they offer. Yet Scaramucci listed that very volatility as a reason to include Bitcoin in retirement accounts.
“People can trade within their 401k without tax consequences,” he said. “If we’re right about Bitcoin and I was your financial advisor, I would tell you that over the next 100 years, this is the technology that people are going to use for a large swath of commerce on the planet. These coins are scarce, and they’re going to be valuable. For that reason, I do think it’s appropriate to own a few in a retirement account.”
But that last point was key, and he responsibly emphasized that any client, including plan participants, should purchase Bitcoin in “in bite-size, digestible chunks so they can sleep safely at night.”
He put $25 million of the firm’s capital in Bitcoin (which grew to $50 million by the time of the interview) and a significant chunk of his personal net worth. In total, with price appreciation and fundraising, the SkyBridge Bitcoin exposure is over $500 million. But he’s an investment professional, and for the masses, he recommended no more than 5% of the retirement portfolio.
“It’s not because I’m not a Bitcoin believer,” he justified. “I want people to feel that if we’re wrong (and I have been wrong in my investment career) and it trades at zero, I don’t want them missing meals or anxious about their retirement.”
On the flip side, if he’s right, it will help participants reach their actuarial retirement goals, and with less risk.
“It was the best performing asset over the last 10 years, and I predict it will be the best performing asset over the next 10 years.”
Messing was even more forceful in his assessment, claiming the 60/40 portfolio is dead, with 10-year Treasuries trading at historic lows and High-Yield Bonds at less than 5%.
“You have to hit a targeted rate of return to meet your financial obligations and retirees are right at the front of the line,” Messing explained. “If you allocate to bonds at these rates, particularly with the amount of money printing that’s going on, you’re signing up for a substantially reduced lifestyle when you retire. I think it’s a smart thing for a retiree to have; bitcoin is a retirement asset.”
Echoing Scaramucci, he said it all depends on the size of the Bitcoin buy, mentioning between 1% and 6% based on individual risk tolerance.
He used recent BlackRock news to back his point. With over $8 trillion in assets, the investment behemoth announced in February that it had “started to dabble” in Bitcoin.
A 1% BlackRock asset dabble would mean an $80 billion position. Even more shocking, the investment was made by the firm’s fixed income shop.
“Fixed income funds investing in Bitcoin?” Messing rhetorically asked. “It’s because the returns from fixed income aren’t high enough to meet the objectives of their investor base. They’re hoping that if a very small allocation performs incredibly well with exponential returns, it can compensate for repressively low interest rates. If it doesn’t, they have the same problem they already did. And losing a bunch of money on a 1% or 2% position isn’t going to really hurt them.”
Scaramucci predicted $100,000 by year’s end but Messing believed the trajectory would continue far beyond that, hitting $500,000 in the next five years, a larger market cap than gold.
“Apply it to anyone who’s got retirement assets,” he said. “I think it’s completely appropriate, particularly for the time frame. Another reason I like it for the 401k is that people have trouble with volatility and timing, but if your time frame is long enough in Bitcoin, you’re not going to get shaken out by a pullback, and at least historically, the rewards have been incredible.”
Scaramucci and Messing closed by noting one additional plus for Bitcoin: a regulatory environment growing more favorable of digital currency. Incoming SEC Chairman Gary Gensler taught a course on digital assets at MIT that’s now available online and Messing believes regulators will soon approve the cryptocurrency ETF. New York City mayoral candidate Andrew Yang wants the United States to be a center for digital assets and New York a digital asset hotspot.
“I think it’s here to stay, but I could be wrong,” Scaramucci concluded matter-of-factly. “I’m a Bitcoin investor, I’m not a Bitcoin evangelist. I’m of the belief that this thing has risks and rewards, and I think that the rewards outweigh the risks.”
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With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
