Those with a keen interest in investing for the future will know that KiwiSaver is New Zealand’s trusted retirement planning vehicle. Having earned a reputation for providing steady growth over the long-term, KiwiSaver is seen by many as a ‘safe’ pair of hands for their hard-earned cash. Conversely, Cryptocurrency (in particular Bitcoin) is frequently perceived as a volatile, short-term investment for the ‘brave’. But despite these two options appearing to occupy opposite ends of the investment spectrum, some fund managers believe it’s a mistake to dismiss Bitcoin outright for KiwiSaver portfolios.

Rupert Carlyon, our Founder and Managing Director, weighs in on some key reasons why combining KiwiSaver with Bitcoin could be a match made in heaven if we're disciplined about how we conduct the relationship…

(Before we get into the details, it’s important to point out that cryptocurrencies are higher risk than traditional financial assets. They are at an early stage in their adoption cycle and therefore volatile. Investing in them is a high risk investment and you should always do your own research.) 

Long-term investment: embracing cyclical assets to navigate volatility

KiwiSaver is a long-term investment product and after withdrawing for their first house, the majority of clients will keep their KiwiSaver investments over 35 years. This long-term investment horizon aligns perfectly with the cyclical nature of Bitcoin. 

Historically, Bitcoin undergoes a four-year cycle which has been closely linked to price, progressing through ‘Bull’ (rising prices); ‘Bear’ (falling prices); ‘Accumulation’ (a levelling out of prices) and ‘Expansion’ (steady growth). Understanding this cycle is foundational to an ability to take a much broader view of Bitcoin’s significant volatility, characterised by dramatic price cycles and short-term fluctuations that can be both exhilarating and terrifying. 

By investing in Bitcoin as part of a long-term strategy within your KiwiSaver, you could potentially capitalise on these cycles because you’re playing the ‘long game’ by default which is often more effective than knee-jerk reactions. This approach minimises the risks associated with high-risk, short-term trading and leverages the extended investment horizon of KiwiSaver to ride out volatility and capture substantial gains in terms of upward market trends. 

While we don’t know whether Bitcoin will continue to trade in the cyclical way that it has in the past (remember, past performance never equals future performance), we can very confidently say you are more likely to be a better Bitcoin investor if you are willing to lock it up for the long term! 

Diversification: Bitcoin’s low correlation with traditional assets

When designing a robust investment portfolio, one of the main goals is to achieve diversification through assets with low or negative correlation. This simply means when one asset class is performing well, another might be flat or even declining in value, thereby balancing the overall risk of the portfolio. 

Ironically, when your goal is to maximise returns whilst minimising risk, Bitcoin can actually make a KiwiSaver portfolio less volatile!

Many traditional financial assets, such as stocks and bonds, have a low correlation with Bitcoin.  This means that when a small amount of Bitcoin is added to a KiwiSaver portfolio, it can help reduce some of the inevitable ups and downs of market cycles.  

Portfolio theory - a framework for constructing investment portfolios in such a way as to maximise expected return for a given level of risk - shows that a 3-4% allocation is the ‘magic number’ to maximise the risk and return tradeoff without making your overall KiwiSaver portfolio strategy a little too risky.

(As at 18 June 2024 the weekly correlation for the past 12 months was -0.2% between the MSCI AC World and Bitcoin)

Potential for outsized gains: Bitcoin's early stage advantage

As an asset class, Bitcoin is still in its infancy compared to gold and stocks. This nascent stage presents a unique opportunity for substantial gains, albeit with a higher risk profile. 

When Bitcoin initially launched, there was a hope among many of the early evangelists that it would replace traditional currencies and become a new form of money.  Unfortunately that path appears increasingly unlikely in the very near term. This, however, does not mean it cannot be seen as a store of value or hedge against inflation... 

The recent launch of the Bitcoin exchange-traded fund (ETF) in the US has made it easy for investors to invest in Bitcoin and attracted over $13 billion in investment in the first five months since launch. This has demonstrated investors confidence that the asset will be seen as a store of value in the future (similar to gold), offering a hedge against inflation and traditional market fluctuations.

Given that the value of gold is currently US$15.6 trillion; whereas the value of all Bitcoin is only US$1.3 trillion, Bitcoin could be seen as a ‘boom or bust’ asset class that will either continue to grow exponentially or, alternatively, be caught as the ‘emperor without any clothes’ and go to zero.  Only time will tell which one of these two answers will be correct, but by allocating a small percentage of your KiwiSaver’s growth assets to Bitcoin, you position yourself to potentially reap outsized returns.

Combining Bitcoin and KiwiSaver the right way

Bitcoin is high risk and can be very volatile; so if you are going to invest your hard earned retirement savings into this asset, you need to make sure that you do it the right way:

• Don’t go ‘all in’ - Funds like Kōura limit you to investing 10% of your KiwiSaver portfolio in Bitcoin.  Whilst this is higher than the optimal number of 3%, this recognises that there are people who will want to go higher than the optimal number.
• Stay the course - Bitcoin will have some pretty big swings. Ideally, you should take a long-term, strategic view (and not bail the moment things get scary!). If you do want to adjust course - whilst you can’t withdraw your KiwiSaver, you can re-allocate away from Bitcoin.  
• Realise the wins - Re-balancing is an important part of investing. This means that on a regular basis, you ‘reset’ your portfolio by taking the wins from one asset class (such as Bitcoin) and reallocating these to other asset classes (i.e. buying when markets are low; and selling when markets are high). As one of only two New Zealand KiwiSavers to offer Bitcoin, Kōura investors have invested $5m into Bitcoin since May 2022  and this is now worth $7.5m (largely thanks to timing the Bitcoin cycle). We recently realised $2.3m of these profits by moving them into other funds. This approach represents outsized gains whilst continually reducing investor risk.  

KiwiSaver and Bitcoin might initially seem like an ‘odd couple’ at face value, but when we dig below the headlines, they complement each other well when considered from a strategic investment perspective. 

KiwiSaver’s long-term horizon dovetails perfectly with the cyclic nature of this asset, allowing investors to leverage volatility for potential gains. The low correlation between traditional assets and Bitcoin can enhance portfolio diversification, and the potential for significant returns from a relatively small allocation to Bitcoin can bolster overall portfolio performance.

Disclaimers:
Cryptocurrencies are highly volatile assets and not suitable for everyone. It is critical to understand that cryptocurrencies still have an uncertain future and are therefore not appropriate for all KiwiSaver members. Before investing part of your KiwiSaver balance in cryptocurrency, it is crucial that you have a clear understanding of all the associated risks: kourawealth.co.nz/cryptocurrency   

Past performance is not an indicator of future performance. 

Members can only allocate a maximum of 10% of their portfolio to our Carbon Neutral Cryptocurrency Fund.