When the Houston Firefighters Relief and Retirement Fund bought $25 million in cryptocurrencies with the fund’s chief investment officer touting their potential, retired fire Capt. Russell Harris was concerned.

He was already worried about his pension after an overhaul by state and city officials cut payments as they grappled with the ability to pay out benefits. He didn’t see crypto as an answer. “I don’t like it. There’s too many pyramid schemes that everybody gets wrapped up in. That’s the way I see this cryptocurrency at this time. . . . There might be a place for it, but it’s still new and nobody understands it.”

The plunge in prices for Bitcoin and other cryptocurrencies in recent weeks provides a cautionary tale for the handful of public pension funds that have dipped their toes in the crypto pool over the past few years. Most have done it indirectly through stocks or investment funds that serve as proxies for the larger crypto market. A lack of transparency makes it difficult to tell whether they’ve made or lost money — let alone how much — and for the most part, fund officials won’t say.

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But the recent crypto meltdown has prompted a larger question: for pension funds that ensure teachers, firefighters, police and other public workers receive guaranteed benefits in retirement after public service, is any amount of crypto investment too risky?

Keith Brainard, research director for the National Association of State Retirement Administrators, says he wasn’t aware of more than a handful of public pension funds that have invested in crypto. “There may come a day when crypto settles down and becomes adequately understood and mature as a potential investment that public pension funds might embrace them. I’m just not sure that we’re there yet.”

The U.S. Department of Labor urges “extreme care” in crypto investments because of the high risks. The recent plunge in crypto prices has caused Washington to more closely scrutinize the freewheeling industry. After the collapse of $40 billion in a crypto asset known as Terra, senators in both parties have proposed legislation that would regulate crypto for the first time and Treasury Secretary Janet Yellen has called for more oversight of crypto ventures.

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The Houston Firefighters Relief and Retirement Fund’s cryptocurrency investment wasn’t very big — just $25 million in what was then a $5.5 billion portfolio. However, the fund bought in when Bitcoin prices were close to their peak of nearly $67,000 and they’ve been on the decline since then, dipping below $20,000 in June.

In a first quarter report, chairman Brett Besselman said the fund was healthy with an overall rate of return of 33.7 per cent in 2021. Earlier this year, Houston Mayor Sylvester Turner said the 2017 overhaul is working well and, thanks to strong returns in 2021, has put his city’s pension funds well ahead of schedule toward eliminating their unfunded liabilities.

Houston’s experiment, which fund managers touted as the first announced direct purchase of digital assets by a U.S. pension plan, followed a series of bigger but indirect investments by two pension funds for Virginia’s Fairfax County. They put more than $120 million into funds that seek opportunities in the crypto world, such as blockchain technology, digital tokens and cryptocurrency derivatives. As in Houston, the Virginia investments are a tiny share of the funds’ $7.2 billion in assets.

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Crypto-related investments aren’t necessarily deliberate. The Minnesota State Board of Investment manages a portfolio worth around $130 billion for several public employee pension plans and other entities. A recent report showed it held small stakes as of Dec. 31, 2021 in the crypto exchange Coinbase Global and the Bitcoin miners Riot Blockchain and Marathon Digital Holdings, with a combined market value of $5.3 million. It also listed two holdings of fixed income securities from Coinbase with a market value of $2.2 million.

In 2017, the California Public Employees’ Retirement System took a tiny stake in Riot Blockchain that grew to more than $1.9 million by late 2020. Securities and Exchange Commission filings show it reached $5.4 million before the CalPERS got out sometime in the second quarter of 2021. Officials declined to give details, but it was a minuscule play in the CalPERS’ total portfolio of more than $400 billion.

Harris says he sees his pension as a contract that should be honoured, given the risks that firefighters routinely take. While he’s generally happy with how his pension fund has performed, he’s still uneasy about crypto. He also points out firefighters in Houston and many other U.S. communities generally aren’t eligible for social security.

“There’s just a lot of people out there, if they lose that pension, it’s over. Some of these older retirees, I just don’t know how they’re surviving.”

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