Depending on who you ask, cryptocurrency is either cutting-edge financial innovation or an elaborate investment scam that would make Allen Stanford blush.
No matter where you are on the crypto spectrum, one unchanging fact is clear: the bubble has burst. What was seen several years ago as a gateway to instant wealth – a bet by investors that these unregulated strings of computer code would one day replace the government-backed fiat currencies that are the bedrock of our financial system – collapsed dramatically.
Around $2 trillion worth of cryptocurrency has been wiped out in recent months. Flagship crypto asset Bitcoin saw its value drop from a high of around $68,000 in November to a minimum of $20,000 in June, a drop of 70%. 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 crypto bets.
But they are not the only ones feeling the pain of the crypto crash. Public pension funds also saw their investments go up in smoke. The Associated Press reported last week that the Houston Firefighters Relief and Retirement Fund is one of a small handful of public pension funds across the country betting on the digital currency boom.
The Houston Fire Department’s investment was relatively low – $25 million in Bitcoin and Ethereum, a fraction of the fund’s $5.5 billion portfolio – but came with a lot of fanfare. NYDIG, a bitcoin company that facilitated the purchase, hailed the announcement as a “watershed moment”, the first-ever bitcoin investment by a US public pension. Ajit Singh, chief investment officer of the fund, was confident the investment would pay long-term dividends.
“Having physical assets — actual tokens — gives us the potential for revenue generation going forward,” Singh told Bloomberg in October.
While it’s easy to say in retrospect that Singh and the firefighters’ fund pension managers should have known not to invest any amount of money in Bitcoin, the fact is that many salient observers have sounded 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 taxpayer-backed public pension funds should not be subject to the whims of such a volatile stock that has virtually no government oversight.
Not much is yet known 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 when Bitcoin prices were peaking, and they’ve since hit a nadir. In a first-quarter report, Besselman said the pension fund was in good shape, with an overall rate of return of 33.7% in 2021. This kind of cushion means the fund can almost certainly weather the crypto hit without flinch.
The question is whether the fund will learn from this cryptocurrency bet. The firefighters fund has had some impressive returns lately, but any fund so heavily reliant on taxpayer funds – over the past two fiscal years, active firefighters contributed 10.5% of their salary to the fund and the city contributed about 32% – shouldn’t take $25 million from the roulette table and put it on the black.
The morally dubious nature of cryptocurrency should also give any pension fund pause. Cryptocurrency is damaging to the environment, with Bitcoin mining alone using more energy per year than Norway and emitting almost £40 billion of carbon. When a scorching heat wave in Texas last week threatened power outages, bitcoin miners across the state voluntarily shut down their machines to help avert disaster.
There is also growing evidence of Texans falling victim to crypto scams. Four years ago, the Texas State Securities Board issued a cease and desist order against a crypto firm that listed a fake address in Houston and posted a photo of Britain’s Prince Charles as an investor. More recently, Plano Army veteran says he was scammed out of at least $220,000 in a cryptocurrency scam. The Federal Trade Commission reported that $575 million of the $680 million in crypto fraud losses in 2021 came from bogus investment opportunities.
The proliferation of cryptocurrency abuse has caught the attention of lawmakers and regulators. Last month, two US senators introduced a bipartisan bill to create a regulatory framework for cryptocurrency. Two weeks ago, Lael Brainard, Vice Chairman of the Federal Reserve, gave a candid speech about the dangers of cryptocurrencyoutlining a series of core principles to curb bad actors in crypto and enable responsible innovation.
As tempting 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 in the crypto market underscore the danger of this strategy. The Houston Fire Department Fund has only dipped their toe in the cryptocurrency sea, but let’s hope they’ve learned not to repeat the bet. The last thing taxpayers need is a crypto-fueled pension crisis that will force a bailout, either through higher taxes or service cuts. Texas public pension funds would do well to take a wait-and-see attitude on cryptocurrency investments until this Wild West niche market is tamed.
