Bitcoin – Irrational Exuberance 2.0

By Mitchell Shames

The other day I received a survey in my inbox to the effect of: “should institutional investors start thinking about Bitcoin?”

The question is so preposterous in my mind that I both deleted the survey and couldn’t help but wonder if markets have crossed the threshold into another era of Irrational Exuberance – Alan Greenspan’s characterization of the dot.com boom… and, bust.  

Every day there are articles and postings about potential new “investments” – Bitcoin, NFT’s, and SPAC’s. Each is touted as either the next great investment opportunity OR the next tulip mania. To be fair, at this point, we simply don’t know. New technologies are always enticing and alluring. But for retirement plan fiduciaries, the unknowns should always temper unbridled enthusiasm.

Fiduciaries hold discretion, with respect to investment decisions, over other people’s retirement assets. Vast numbers of employees are relying on these assets to fund their retirement. Given the magnitude and the implications of this responsibility, fiduciaries are charged with acting prudently. Each investment decision is judged against this standard of prudence.

Over the past decades (it’s almost 50 years since ERISA was enacted) norms of investment decision-making have developed around the investment of plan assets. Whether assessing a manager or a strategy, analysis of past performance is a central principle in making investment decisions. Legions of consultants stand ready to assist plan fiduciaries in determining whether a manager or strategy fits within an asset allocation plan or within investment guidelines. Most of these analytics include a detailed review of investment performance.

When it comes to most of these new investment opportunities, however, there simply is no performance history. There should be no need for a survey. Right out of the box, these assets should not be eligible for ERISA qualified plans. But, yet, they are quite enticing.

The pandemic has stretched on long enough. Corporate earnings took a significant hit in 2020.  As we begin to come out of the global quarantine there are glimmers of revived economic output. The pent-up demand is staggering; so is the urge to make up for the lost time and the lost earnings. Bitcoin, NFT’s and SPAC’s play into the zeitgeist of the moment.

Retirement plan fiduciaries must stick to tried and true, prudent methodologies. Certainly, they must assess the performance of the plan investments through the pandemic. But, while annual performance is important, performance also must be viewed over longer periods; three, five, and ten years. If a review indicates that changes to a portfolio might be warranted, they must start with the investment guidelines for the plan and the assumptions underlying the guidelines. By necessity, this needs to be a deliberative, careful, and yes, a prudent process.

Bitcoin, NFT’s, and SPAC’s are the glittery new objects in the investment universe. The allure of outsized investment returns is powerful. Fiduciaries, however, should know better. They must exercise prudence before committing retirement funds to these assets.

Yes, I am skeptical. However, I also know that as a fiduciary, I must keep my eye on these new investments, as well as others that come onto the horizon. While they might not be prudent today, who knows what the next five or ten years may bring.

But, today, surveys regarding Bitcoin are premature.

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