States weigh pros and cons of investing in cryptocurrency

This article was originally published by The Pew Charitable Trusts.

Once considered a fringe investment, cryptocurrency is beginning to make inroads into state and local government finance.

In 2025 alone, at least 19 states considered or passed legislation that would allow a portion of state funds to be invested in digital assets or related investment products, according to a review by The Pew Charitable Trusts. Cryptocurrency is a form of digital currency that can be used to make payments, although it is more often treated as a high-risk investment.

Last May, New Hampshire became the first state to approve such a law and is now on track to issue the first municipal bonds backed by bitcoin, a cryptocurrency created in 2008. Texas, meanwhile, launched and seeded a state Strategic Bitcoin Reserve, making it the first state to fund a cryptocurrency reserve.

The push has continued this year with new legislation in Maryland and Tennessee, among others. In January, Wyoming became the first state to issue its own stablecoin—digital coins pegged to the U.S. dollar. That move was aimed at eliminating electronic transaction fees often imposed by traditional financial institutions by using blockchain technology, which provides a shared and unchanging digital ledger to record transactions and track assets.

Until 2024, cryptocurrency’s volatility and regulatory uncertainty kept it largely on the sidelines of state funds. But that year, bitcoin products won Securities and Exchange Commission (SEC) regulatory approval, opening the door for states to explore a new investment avenue for their funds. Then in 2025, the Trump administration established a national Strategic Bitcoin Reserve and released a policy report outlining further financial policy and regulatory recommendations for digital assets.

Still, the public finance world has remained largely skeptical about whether cryptocurrency should have a place in the public purse at all. A recent survey of public finance professionals pointed to the sector’s cautious stance toward risk as a reason for why only 10% of respondents agreed that cryptocurrency is a viable option for diversifying public investment portfolios.

As states explore the potential benefits and risks of banking on digital currencies, policymakers are seeking approaches that signal to investors and the industry that they intend to pursue such investments—without asking taxpayers to shoulder the risk.

A Boost for Cryptocurrency

The wave of crypto-related legislation in 2025 followed the SEC’s 2024 approval of new financial products, such as exchange-traded funds (ETFs) that track bitcoin’s daily market price by buying and selling it—a way for investors to gain exposure to the asset without having to store or secure the cryptocurrency themselves. Experts say that investing in a cryptocurrency ETF can reduce vulnerability to hacking and other potential risks associated with holding bitcoin directly.

Some state proposals would authorize investment in these new products while others would allow direct investment in digital assets. To reduce risk, proposals have included limits such as capping the percentage invested to 5% or 10% of public funds, or instituting a requirement for a high market capitalization threshold for qualified digital assets. Market capitalization refers to the total value of an asset’s existing shares. Investors consider high market cap cryptocurrency a lower risk investment due to its track record of growth and high liquidity, because more investors can cash out without dramatically affecting the asset’s value. Among the bills with a market capitalization threshold, investments would so far be restricted to bitcoin.

Few of the proposals, however, would limit the types of public funds that can hold cryptocurrency, leaving the door open for stabilization accounts like rainy day funds or budget reserves to include the volatile asset class. Because rainy day funds are intended as a fiscal cushion in times of need, they are primarily invested in short-term, low-risk, low-yield assets such as bonds.

Alternative assets can help buffer a portfolio against broader economic shifts and provide potentially higher yields than bonds during downturns. However, they also tend to be more volatile and may increase the risk of investment loss, particularly if funds must be withdrawn at an inopportune time. Bitcoin’s volatility has decreased over time, but it remains more volatile than traditional asset classes. Bitcoin ETFs, meanwhile, tend to mimic this volatility rather than buffer against it.

In Utah, a provision that would have allowed state reserve funds to be invested in cryptocurrency was cut from H.B. 230 before the bill passed last year. State Treasurer Marlo Oaks (R) said that alternative assets such as digital currencies were more appropriate for endowment-type portfolios, because their time horizons tend to be long enough to absorb the risk of volatility shocks. But for a fund where money could be “expended in a relatively short time horizon,” Oaks explained,  “it really narrows the asset classes that you can invest in.” He added that the appropriate asset classes for rainy day funds are even more narrow because they are typically tapped during downturns.

New Hampshire’s law, H.B.302, allows up to 5% of certain public funds, including the state’s rainy day fund, to be invested in large-cap cryptocurrencies and precious metals and establishes a digital assets reserve. State Representative Keith Ammon (R), the bill’s sponsor, said he anticipates the investment approach will start with small amounts in large, long-term funds. But to him and others, digital currency adoption isn’t just an investment opportunity— it also represents an economic signal.

“It was obvious to me a decade ago that this [was] going to be a big deal,” Ammon said. “It's the beginning of a brand-new financial system, and if we want prosperity for our state and its citizens, we should be welcoming this innovation, the capital formation, the innovators, the entrepreneurs.”

In fact, the law caught the attention of digital asset management companies and investors who are now working with the New Hampshire Business Finance Authority (BFA) to issue a $100 million municipal bond backed by bitcoin. BFA Executive Director James Key-Wallace said that the private companies would set aside roughly $160 million in bitcoin in a New Hampshire-based trust as collateral, and the authority would issue a conduit bond on their behalf. Bond buyers would be paid back with interest by the borrower, with guarantees of repayment if bitcoin’s value falls to a certain level, while the BFA would get a fee for the sale.

Key-Wallace said the goal was not only to break new ground and attract more digital asset investors but also to create a new source of revenue for the BFA, which provides loans and other types of funding to businesses throughout the state.

“Our hope is that if we do this type of transaction many, many more times, that it really starts to add up,” he said.

A Targeted Approach

However, many in the industry remain skeptical. In 2025, 57% of respondents in Hilltop Securities’ annual public finance leaders survey indicated that cryptocurrency was not an appropriate investment option for public entities. Concerns cited by the report included volatility, murky regulatory regimes, and vulnerability to fraud and market manipulation.

Some states are pursuing more targeted approaches when exploring the potential uses of cryptocurrency. Wyoming is focusing on “stablecoins,” a type of digital currency designed to be less volatile because their value is pegged to a real-world monetary asset. Wyoming’s Frontier Stable Tokens, which the state began issuing in January, are backed by cash and U.S. Treasuries.

Arizona and Texas are turning to strategic bitcoin reserves, which hold cryptocurrency in a separate state account. Texas lawmakers have so far appropriated $10 million, which has been deposited into the reserve in bitcoin, according to the state comptroller’s office. The amount is a small fraction of the $48 billion that the state holds across its rainy day fund and ending balance, but with legislative approval, bitcoin reserve assets could be cashed out and used in times of economic stress.

Arizona’s law is more limited. It updated the state’s unclaimed property law to include digital assets, allowing the state to hold cryptocurrency instead of converting acquired digital assets into dollars immediately. The legislation established a separate reserve for those assets and set rules for how the state can hold, stake, and sell unclaimed cryptocurrency.

Adam Schwend, director of public policy for the State Financial Officers Foundation, said he could see other states trying Arizona’s “middle ground” approach, because it doesn’t involve using state dollars to directly purchase cryptocurrency.

“It could be an interesting foot in the door,” he said. “If they [states] are finding themselves holding a great deal of bitcoin and it remain[s] stable, that may move people in a more pro-crypto direction.”

Final Thoughts

States interested in cryptocurrency are taking different approaches, ranging from treating it as an investable asset to using it as a tool for economic positioning and development. Although these new ventures are designed to insulate state general funds from direct fiscal impacts, practices such as stress tests or other types of modeling can serve as fiscal guardrails to help investment officers evaluate investment targets and volatility risks.

More broadly, policymakers’ interest in digital currencies represents an exercise in asset diversification—an investment strategy intended to reduce exposure to economic shocks—at a time when many in the investment world are rethinking portfolios. This so-called “global rebalancing” is shifting investments away from a weakening U.S. dollar toward alternatives like gold and foreign bonds.

Digital currencies may eventually be viewed as a strong investment alternative. “Bitcoin holdings may provide a hedge against long-term debasement of fiat currency through inflation,” S&P Global noted in an analysis last year. But for now, the ratings agency added, cryptocurrency is likely to remain a side bet in public finance.

Liz Farmer is a senior officer with The Pew Charitable Trusts’ Fiscal 50 project and Gayathri Venu is an associate with Pew’s state fiscal policy project.