31% of new crypto buyers influenced by friends. Why be careful

When it comes to cryptocurrency like bitcoin, new investors are often motivated by friends to take the plunge, according to a new study.

But it can contain traps for the unwary, experts warn.

“I don’t imagine friends talking about when they lost money,” said Lee Baker, a certified financial planner and founder of Apex Financial Services in Atlanta.

“Sexy sells,” added Baker, a member of CNBC’s Advisor Council. “The upside is selling.

“But people don’t talk about the downsides,” he added.

Nearly a third – 31% – of new cryptocurrency investors in 2022 used a friend’s recommendation as their primary reason for buying in, according to a recent joint study published by the Financial Industry Regulatory Authority Investor Education Foundation and NORC at the University of Chicago. Friends’ recommendations were the #1 motivating factor for new crypto buyers.

That share compares with 8% of new investors in more traditional assets such as shares and bonds.

The disparity indicates that there is “a social element to investing in cryptocurrency that is not evident in stock or bond investing,” according to the study.

This does not mean that a friend’s recommendation is necessarily a bad reason to buy into the digital assets.

But it can be a “double-edged sword,” said Gary Mottola, director of research at the FINRA Investor Education Foundation and co-author of the report.

On the one hand, crypto can be a run-on to more traditional investing — which is generally a good outcome, Mottola said. There is some evidence that this is happening: 36% of new crypto investors said their purchase made them more interested in investing in the stock market, the study found.

However, “friends recommend [crypto]the sources of information on social media may not be reliable,” Mottola said.

The fear of missing out can be a powerful driver of investment decisions.

Bitcoin and other crypto assets surged through 2021, a record year for the digital assets. Bitcoin jumped from roughly $10,000 in the summer of 2020 to a peak above $68,000 by November 2021.

But the tide quickly turned during a so-called “crypto winter,” when investors lost more than $2 trillion in the year following the market peak.

Celebrities, such as actress Lindsay Lohan and rapper Soulja Boy, were recently fined by the Securities and Exchange Commission for undisclosed endorsements of various cryptocurrencies.

“Unless they’re a legitimately knowledgeable financial person, trust but verify,” Baker said of information you might hear from friends or from “pseudo-experts” on social media.

One of the dangers of following a friend’s advice: Investors may not understand the risks and volatility associated with crypto (or other investments), or how it fits into a broader, well-diversified investment portfolio, he said.

Another potential pitfall: You might get a friend’s recommendation when the market is nearing its peak, when much of the growth potential has already been realized.

Bitcoin’s current value of around $30,000 is almost double what it was at the beginning of 2023. Baker expects to be making more calls about crypto soon if the trend continues.

“If you do any investigation [about crypto]I think that’s great,” Baker said. “If you just take information blindly without doing any investigation, that’s a terrible idea.”