Public Pension Funds Eroded by Headwinds from Crypto Winter

Pension funds that have bet on the cryptocurrency market over recent years face difficulties navigating the ongoing crash associated with digital assets.

Caisse de dépot et placement du Québec, Canada's second-largest pension fund, invested $150 million in Celsius Network LLC last October. In July, the crypto lending platform, Celsius, filed for bankruptcy protection because of "extreme market conditions" that prompted a wider selloff.

The Houston Firefighters' Relief and Retirement Fund bought $25 million worth of Bitcoin and Ether in October last year. Since the announcement, both cryptocurrencies have dropped by more than 50%.

"Of course, we would have preferred otherwise. But volatility and large swings are expected, "said Ajit Singh, the investment chief at Houston Firefighters' Relief and Retirement Fund investment.

Over the previous two decades, public pension funds have increasingly invested in less-traditional assets in response to low fixed income.

The recent capital market crash has been painful for investors, especially those who have recently retired or are planning to do so in the next year or two.

The Market Meltdown

Several pension funds and sovereign wealth funds (SWFs) have already invested indirectly in crypto assets through stocks such as Tesla, MicroStrategy, and Coinbase.

California Public Employees' Retirement System (CalPERS), California's $441 billion public pension fund, increased the number of its shares in Riot Blockchain, a publicly traded Bitcoin mining firm, in February last year.

In April, a major U.S. asset manager Fidelity Investments in April allowed firms to include Bitcoin investments in their employee 401(k) defined-contribution benefit plans.

Over the two months, important events happened. The global crypto market cap dropped below USD 1 trillion (USD 3 trillion at its peak in October 2021), and the values of cryptocurrencies plunged around 70%.

The plunged values of crypto coins have taken a steep toll on many lending firms and investment funds that deal with those volatile assets. The dreadful incident heightened the risk of losing trust in the industry, creating ease a downward spiral.

Since the U.S. Federal Reserve and other central banks moved to tighten monetary policy, money has flowed back from digital assets. Bitcoin has lost more than 60% of its value since the end of last year.

Such losses have driven many crypto lenders into bankruptcy or forced them to take drastic steps like freezing withdrawals.

Decentralized finance platforms promising big returns have also suffered heavy losses on some investments, with some hurt by the terra crash.