Don’t risk state pensions with crypto
Shaky strategy endangers workers’ retirement as officials gamble on unstable investment funds.
Depending on whom you ask, cryptocurrency is either a cutting edge financial innovation or an elaborate investment scam that would make Allen Stanford blush.
Regardless of where you fall on the crypto spectrum, one immutable fact is clear: the bubble has burst. What was seen several years ago as a gateway to instant wealth — a wager by investors that these unregulated strings of computer code would someday replace the fiat currencies backed by governments that are the bedrock of our financial system — has tanked spectacularly.
Roughly $2 trillion in cryptocurrency value has been erased in recent months. Flagship crypto asset Bitcoin has seen its value plummet from a peak of roughly $68,000 in November to a low of $20,000 in June, a 70 percent tumble. It turns out that no amount of complex coding can overcome the economic laws of gravity — soaring inflation, rising interest rates and growing fears of a recession. No wonder investors are reconsidering their bets on crypto.
But they are not the only ones feeling the pain of the crypto crash. Public pension funds have also seen their investments go up in smoke. The Associated Press reported last week that the Houston Firefighters Relief and Retirement Fund is among a small handful of public pension funds across the nation that bet on the digital currency boom.
The Houston firefighters’ investment was relatively small — $25 million in Bitcoin and Ethereum, a fraction of the fund’s $5.5 billion portfolio — but came with a good deal of fanfare. NYDIG, a bitcoin company which facilitated the purchase, hailed the announcement as a “watershed moment,” the first-ever bitcoin investment by a U.S. public pension. Ajit Singh, the chief investment officer for the fund, was bullish that the investment would pay dividends long-term.
“Having physical assets — actual tokens — gives us in the future the possibility of income generation potential,” Singh told Bloomberg in October.
While it’s easy to say in hindsight that Singh and the pension managers for the firefighters’ fund should have known better than to put any amount of money into Bitcoin, the fact is that many salient observers have been raising the alarm about the risk associated with cryptocurrency for years. It’s one thing for deep-pocketed hedge funds and individual investors to dip their toes into the crypto pool. But public pension funds backed by taxpayers should not be subjected to the whims of such a volatile stock that has virtually no government oversight.
We don’t yet know much about the status of the firefighters’ $25 million investment. The fund’s chairman, Brett Besselman, did not respond to a request for comment. But here’s what we do know: The fund bought in when Bitcoin prices were peaking, and they’ve since hit a nadir. In a first-quarter report, Besselman said the pension fund was healthy, with an overall rate of return of 33.7 percent in 2021. That kind of cushion means the fund can almost certainly withstand the crypto hit without blinking.
The question is whether the fund will learn from this gamble on cryptocurrency. The firefighters’ fund has had impressive returns of late, but any fund so heavily dependent on taxpayer funds — in the last two fiscal years, active firefighters contributed 10.5 percent of their salary to the fund and the city chipped in roughly 32 percent — shouldn’t be taking $25 million to the roulette table and putting it on black.
The morally dubious nature of cryptocurrency should also give any pension fund pause. Cryptocurrency is environmentally damaging, with Bitcoin mining alone using more energy annually than Norway and emitting nearly 40 billion pounds of carbon. When a scorching heat wave in Texas last week threatened blackouts, bitcoin miners across the state voluntarily shut down their machines to help stave off catastrophe.
There’s also growing evidence of Texans falling victim to crypto scams. Four years ago, the Texas State Securities Board entered a cease and desist order against a crypto company that listed a fake address in Houston and posted a photo of Britain’s Prince Charles as an investor. More recently, an Army veteran from Plano said he was swindled out of at least $220,000 in a cryptocurrency scam. The Federal Trade Commission reported that $575 million of the $680 million crypto fraud losses in 2021 were from bogus investment opportunities.
The proliferation of cryptocurrency abuse has caught the attention of lawmakers and regulators. Last month, two U.S. senators introduced a bipartisan bill aimed at creating a regulatory framework for cryptocurrency. Two weeks ago, Lael Brainard, vice chair of the Federal Reserve, delivered a blunt speech on the dangers of cryptocurrency, outlining a series of fundamental principles for reining in bad crypto actors and enabling responsible innovation.
As tantalizing as it may be for pension funds to bet on the long-term future of digital currency as a quick fix, the recent wild convulsions of the crypto market underscore the danger of that strategy. The Houston firefighters’ fund only dipped its toe in the cryptocurrency sea, but let’s hope they’ve learned to not repeat the gamble. The last thing taxpayers need is a crypto-fueled pension crisis that will force a bailout, either through higher taxes or service cuts. Public pension funds across Texas would be wise to adopt a wait-and-see posture on cryptocurrency investments until this Wild West niche market is tamed.