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Will Nigeria Pension Funds consider investing in Cryptos?

By Moshood Ayeni

The rise in alternative investment opportunities has taken the centre stage in recent times. Traditional investment bouquets such as fixed deposits, government securities, and equities have seen a decline in returns especially the fixed interest-bearing ones. Governments and institutions are looking for ways to reduce costs of borrowing and hence offer low-interest rates to investors.

The global economic meltdown occasioned by the rampaging pandemic has also contributed in no small measure to the fall in interest rates of traditional investments. Hence, investors are seeking better alternatives, irrespective of the economic situation, to put their funds into that will yield the highest possible returns.

Considering the risk appetites of investors, there needs to be a balance between risk and reward.

For risk-averse investors, they will likely stick to the low-risk investment types such as government securities and money markets. This set of investors are likely to get little return on their investments especially now that rates have dropped to the region of 5% and below per annum.

For the high-risk takers, this set of investors are likely to put funds into variable investment bouquets such as equities with a potential to get a higher return considering the risk involved.

The NSE performance for the year 2020 has been the best in the world returning +50% on average. Looking at the wide gap between fixed income instruments and variable income instruments, it is a no-brainer that investors will divest significantly into variable income instruments in the foreseeable future.

In Nigeria, however, the depth of variable investment instruments is limited to traditional investment types such as equities, mutual funds, REITs, and Infra Funds. This problem is likely to be solved with the emerging popularity of the Crypto market or maybe not.

Will Pension Fund In Nigeria Invest in Crypto?

According to Wikipedia, “a cryptocurrency or crypto is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database using strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership.” 

However, its properties are virtual, and it is stored or hosted within a different medium — Blockchain. Some common types of cryptocurrencies are Bitcoin, Ethereum, and Ripple (XRP).

The Crypto market offers a great and rewarding alternative to traditional instruments with the potential to deliver high ROI. Caution should be taken in investing in Crypto because of its high volatility.

 

Notwithstanding, with proper hedging and trading techniques, investors are likely to sail the boat smoothly as can be seen in other climes.

As of January 2020, over 2,000 cryptocurrencies already exist. Trading these currencies is a form of business where people exchange them for digital assets, other currencies — legal tenders — or other virtual currencies.

Surprisingly, the performance of the PFAs in Nigeria in 2020 beats all known forecasts. PFAs Return on Contribution Invested (ROCI) averaged between 16%/21% for all types of pension funds, beating the inflation rate.

One possible reason for this stellar performance is the fact that the majority of the fixed income instruments with high rates matured during the year 2020. This helped partially in cushioning the effect of the now low-interest rates and yields that ended the year.

The high ROCI is not likely to be repeated in the year 2021 if all that is invested in are the traditional instruments. In actual fact, the performance of the PFAs in 2021 is likely going to be decided by the variable instrument performance. If the variable instruments performed favorably, then the pension funds will likely tow that line and vice versa.

This calls for the need to review the investment regulation of the PFAs by PenCom to allow the PFAs to invest in other instruments to increase the net asset value (NAV) of pension funds thereby giving contributors good returns on their monies.

Although, the CBN in 2017 issued a statement cautioning the use of cryptos citing reasons such as high volatility, money laundering, and terror financing, etc. This has also been emphasized recently in February 2021 and clearly has shown the direction the financial regulatory bodies are facing at the moment.

However, it is important for the regulators to look critically at the potential this innovative and disruptive investment window has to offer. It is important to take a position from the point of knowledge and not that of ignorance or fear just as reiterated by the Vice President, Prof. Yemi Osinbajo.

Taking a cue from other pension funds in other climes, hedge funds and investment firms have begun investing in Cryptos as an alternative investment bouquet because of their huge potentials and they are taking advantage to deliver value to their contributors.

Another reason to consider investing in Cryptos is the issue of devaluation of the Nigerian Naira. Pension funds are majorly domiciled in Naira, which has taken a big hit since 2020, thanks to devaluation. This devaluation has definitely eroded the gains or growth on contributions as well.

It is believed that with proper legislation and guidance, the gains and advantages of cryptocurrency Investments can be replicated here in Nigeria considering the high potential for growth and returns to contributors.

It is believed that with the global acceptance of Cryptos gaining ground, Nigeria regulators especially financial regulators such as CBN, SEC, and PenCom will embrace this innovative and disruptive idea and join the train now and not play a catch-up race in the future.

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