MassMutual, a 169 year old life insurance company, announced last month that it set a precedent by investing $100,000,000 of its general investment account in bitcoin. Bitcoin is the most well known cryptocurrency and largest digital asset in terms of market capitalization…
As digital assets become more mainstream, will many other large insurance carriers1 and institutional investors follow MassMutual’s lead and does the embrace of bitcoin as an investment bode well for the development of new insurance products for the crypto industry?
MassMutual Bitcoin Investment Is A Milestone
Regarding the milestone financial investment, the pre-Revolutionary War insurance firm told the Wall Street Journal that it wanted to achieve a “measured yet meaningful exposure to a growing economic aspect of our increasingly digital world”.
Indeed, the MassMutual bitcoin investment is “measured” as it represents only 0.04% of the company’s $235 billion general investment account…
The announcement is also “meaningful” because few institutional investors have publicly committed significant sums to the emerging asset class of cryptocurrencies.2
Insurers are both conservative and highly regulated. They must maintain reserves to pay claims and/or annuities… As such their investment portfolios are comprised of highly rated, investment grade and credit-enhanced opportunities such as fixed income government debt, real estate, renewable energy and stocks.
However, yields on fixed income investments, such as bonds, are at historic lows. Indeed, government debt is yielding 50 basis points, or closer to zero in some cases. This is driving institutional investors, such as pension funds, public companies and other fiduciaries to seek better functioning alternatives to the double-digit percentage points of exposure they may have to government bonds.
More companies may follow MassMutual’s lead in seeking measured yet meaningful exposure to more liquid, “hard assets” like gold and – perhaps more appropriately – to bitcoin, as “digital gold”.
Moving To Digital Gold?
Many renowned investors are embracing the concept of bitcoin as digital gold… These investors include Mike Novogratz, Raoul Pal, Michael Saylor, Stanley Druckenmiller and Paul Tudor Jones.
In a recent interview with Bloomberg, JP Morgan strategist Nikolas Panigirtzoglou estimated that investors will be shifting from gold to bitcoin for years to come…
Unlike gold, Bitcoin has a fixed supply of 21,000,000 and a payment network effect that could be valued using Metcalfe’s Law. When comparing it to gold, Ethereum founder Vitalik Buterin put it more bluntly in a recent blog post:
"One of the more underrated bull cases for cryptocurrency that I have always believed is simply the fact that gold is lame, the younger generations realize that it's lame, and that $9 trillion has to go somewhere..."
Scott Minerd, Chief Investment Officer of Guggenheim Investments, with $250 billion of assets under management, believes bitcoin should be worth $400,000 per coin.
To put this in perspective, Gold has a global market capitalization of approximately $9-11 trillion… If bitcoin’s market capitalization reaches that of gold, it implies a price of ~$500,000 per bitcoin, or 16x greater than its recent $30,000 milestone.
Of course, Bitcoin could also fail entirely or be outlawed or regulated into oblivion…
As such, significant interest in bitcoin from more conservative investors may never actually materialize.
Bitcoin And Crypto Insurance Product Development
Whether Bitcoin ultimately succeeds or not, blockchain and cryptocurrency technology is here to stay.
New positive developments in crypto are so common these days that they’re often missed…
For example, U.S. financial regulators recently approved the idea of allowing established, nationally chartered banks to use public, independently verified, decentralized blockchains to process payments via stablecoins.3
Coinbase recently went public in a successful direct listing and Grayscale recently announced it aims to launch a Bitcoin ETF.4
Bitcoin’s percentage of renewable energy used in mining is growing and it may provide a solution for renewable energy oversupply.
As crypto matures, insurers may develop new property insurance products for crypto-custody or allow customers to pay insurance premiums with stable coins, or give people the ability to receive insurance settlements in bitcoin.
At the very least, insurance underwriter appetite for writing crypto-risks should expand as they become more familiar with the market and as actuarial data is collected.
The technology is evolving incredibly fast, but overall I am optimistic that the insurance industry will not only increase its exposure to bitcoin and cryptocurrencies as a digital asset class, but also develop new more competitive insurance products. from investing to product development…
Footnotes
- Since this article was written, property and casualty insurers Liberty Mutual and Starr Insurance have invested in NYDIG and gained direct exposure to bitcoin.
- MassMutual made a small equity investment in NYDIG (New York Digital Investment Group), a cryptocurrency financial services firm, that both managed the bitcoin transaction and will oversee the crypto-custody service.
- The use of stablecoins provides an "on ramp" for mainstream adoption of cryptocurrencies for payments and/or investment.
- Recently the company halted new investments in its Bitcoin and Ethereum trusts because of lack of supply, leading to increased "FOMO" amid new all-time highs.
