Bitcoin
State is ‘underinvested’ in Bitcoin EFTs despite recent purchase, says UW-Whitewater professor
The Wisconsin pension fund bought $164 million worth of Bitcoin shares earlier this year in two bitcoin exchange-traded funds, also known as ETFs. The investment was made after the Securities and Exchange Commission approved the creation of Bitcoin ETFs in January.
The fact that these purchases are in exchange-traded funds is important, according to Paul Nylen, a professor at the University of Wisconsin-Whitewater and director of the Blockchain and Cryptocurrency Institute at UW-Whitewater.
“This has allowed pension funds and other investment boards to allow someone else to actually custody Bitcoin and have that fund — like Blackrock or Fidelity — issue shares,” Nylen told WPR’s “Wisconsin today,” so the investment board could purchase shares of a fraction of Bitcoin, rather than actually holding its own keys to Bitcoin itself.”
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Cryptocurrency comes with well-publicized baggage. The global electricity usage associated with Bitcoin each year is on par with the country of Australia, according to the US Energy Information Administration. The Department of Homeland Security linked cryptocurrency more broadly for money laundering, cybercrime and consumer fraud.
Bitcoin stocks can also be extremely volatile, with the price of one Bitcoin falling from nearly $66,000 in 2021 to around $16,000 in 2022. Since then, Bitcoin has reached a new high of around $71,000 this year . But Nylen says volatility is good for long-term growth.
He spoke with WPR’s “Wisconsin Today” to break down what this purchase means for Wisconsin.
The following has been edited for clarity and brevity.
Kate Archer Kent: The Wisconsin Investment Board purchased shares of a Bitcoin exchange-traded fund. So how does the state’s purchase of ETF shares differ from the direct purchase of Bitcoin?
Paulo Nylen: In Bitcoin, there is this phrase you will sometimes hear: “Not your keys, not your coins.” And unfortunately, I think for much of Bitcoin’s history, there have been very bad custodians.
So if you think about (Bitcoin exchanges) FTX and Mount Gox, and all these kinds of famous news stories – and these were companies located in the Cayman Islands, or somewhere like that, that eventually lost their Bitcoin keys or did something fraudulent on your customer’s behalf. What we have now are branded institutions, right? So Fidelidade, Bitwise, BlackRock. And they are the ones who really hold the keys to Bitcoin.
Bitcoin is a bearish asset, so whoever holds the private keys has the ability to move that Bitcoin. So the state of Wisconsin is relying on a third party here, but the investment boards have to do this. They can’t bring all their gold to their offices and they can’t physically hold their Apple shares. They need a third party. So, there is a difference there.
I don’t see how a big state like Wisconsin or all of its pension funds could actually custodian their own Bitcoin. They would let BlackRock or Fidelity do it. And so I think, given that circumstance, it’s a great solution for Wisconsin.
KAK: The US House passed legislation creating a new framework for how federal agencies would regulate cryptocurrencies. We heard the CEO of the Crypto Council for Innovation call this vote a “defining moment.” Would this new regulatory approach be good for Wisconsin?
PN: The best way to think about this is to ask, “What is the current regulatory approach?” And the current approach is a mess. There have been ongoing lawsuits with the Securities and Exchange Commission for over a decade. All this really does is help clarify which administrative bodies are responsible for cryptocurrencies. And so I think any clarity on this point is probably good clarity.
KAK: Should the Wisconsin Investment Board hold these new assets? When would they sell their Bitcoin shares?
PN: In fact, I’ll take it a step further. I think Wisconsin is a little underinvested. Wisconsin put less than 1% of the fund there. I think the 1% to 3% allocation is probably the direction a lot of this advice is going. I realize that (the Wisconsin Investment Board) wants to take the plunge. But Bitcoin is a long-lived asset. So in my opinion, it’s the last thing you sell.
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