Cryptocurrency has been touted as the key to building black wealth. But critics say investing is too high a risk.

by Arthur · August 20, 2022

At the time, Williams didn’t know much about cryptocurrency, but decided to invest a little more than $200 to see where it would take him.

“No one knew what it was,” Williams said. “But it was going to change the world. So I drank a lot of crypto Kool-Aid.”

Cryptocurrency – decentralized digital money like bitcoin and ethereum – will gain momentum among black investors in the coming years. As the hype grew, Williams cashed out in 2020 and bought his mother a house. He had learned enough about cryptocurrency to know it was time to get out.

“I was done gambling,” said Williams, now an adjunct law professor at the University of New Hampshire.

Despite his earnings, Williams worries that savvy investors are promoting cryptocurrency to black Americans as the key to financial inclusion and closing the wealth gap without fully explaining the risks.

A study released earlier this year by Charles Schwab and Ariel Investments found that black Americans were more likely than white Americans to invest in cryptocurrency. The study highlights data showing that black investors are less likely than white investors to believe that cryptocurrency is a risky investment, despite the extreme volatility of cryptocurrency, according to the study, black people are also more likely to make investment decisions based on social media or other less credible sources.

The disparity makes black investors disproportionately vulnerable when the cryptocurrency market collapses. Critics argue that black Americans lag behind their white counterparts in financial literacy, which they say is key to making smart cryptocurrency investment decisions. Yet social media influencers, black celebrities, athletes and conference organizers continue to work to lure more black investors into cryptocurrency, touting their own financial gains.

“Cryptocurrencies don’t solve living wages, they don’t address unemployment,” Williams said. “Black people are so eager and so thirsty for financial inclusion and economic opportunity that by default we are more ripe for exploitation.”

But seasoned investors say cryptocurrency appeals to black people for many reasons. Among them are the low barriers to entry because there are no credit checks or income requirements; equal opportunity for success regardless of race or generational wealth; and many merchants accept cryptocurrency as a payment method.

How does cryptocurrency work?

Successful black investors say it’s important to educate potential investors about how cryptocurrency works so they can make smart decisions about how to invest their money.

Cryptocurrency is essentially money that is bought, sold and exchanged online. Unlike the US dollar, cryptocurrency is not regulated by the government, but instead operates in a decentralized system called a blockchain.

The goal is for cryptocurrency investors to buy it at a low price, wait for its value to rise and then withdraw the profit. When the demand for cryptocurrency increases, its value goes up. If values fall, or the market crashes, investors stand to lose money.

There are many different types of cryptocurrency. Bitcoin, which has been heavily promoted by celebrities and athletes, is one of the most popular due to its low transaction fees and ease of use.

Cryptocurrency has also gained popularity in the black community due to success stories.

For example, Terrance Leonard invested $2,000 in 2019, and by 2021, his cryptocurrency investments grew to $1 million. The year before, he was able to buy a house in Washington DC when he sold some of his cryptocurrency to pay the earnest money and make a down payment. He eventually hopes to sell more cryptocurrency and pay off the mortgage.

Leonard said becoming a millionaire doesn’t happen overnight and it takes dedication and a willingness to study the market.

“It’s going to be scary and you’re going to be nervous because there’s money at stake and a lot of times people invest more money than they can afford to lose,” Leonard said sadly. “But you have to dive in. Treat it like you treat any of your other interests.”

A “risky investment”

However, some researchers are skeptical of cryptocurrency.

Algernon Austin, director of racial and economic justice for the Center for Economic and Policy Research, called cryptocurrency a “get-rich-quick scheme.”

Austin said that investing in cryptocurrency can be harmful to people who have no general experience in investing because the market is so volatile.

Austin said low-income black families shouldn’t be gambling with their money without the guidance of a financial advisor.

“Most African-Americans got into cryptocurrency when the values were high, so that means people are losing money,” Austin said. “And we’re talking about a low-wealth population losing wealth, that’s not good. It’s the riskiest investment you can make.”

“A Fair Financial Ecosystem”

But cryptocurrency strategists and successful investors insist that investing will help black people recover financially.

According to the Federal Reserve, the median net worth for a white family is $188,200 compared to $24,100 for a black family.

Charlene Fadirepo, a Bitcoin advisor, said black Americans have long been barred from fair access to wealth due to systemic racism. Fadirepo pointed to home ownership being lower in the black community because banks have historically denied mortgages to black families.

Fadirepo said cryptocurrency offers a level playing field for all investors.

“This is our shot at a fair financial ecosystem,” Fadirepo said.

Fadirepo, who plans to speak at a conference next month that educates participants about cryptocurrency and connects black investors, said she encourages potential investors to invest only what they can afford after paying for basic necessities. Part of that requires creating a budget for your extra funds, she said.

“This is about responsible and smart investment,” Fadirepo said. “If you’re not in a position to invest, if you have significant debt, if you have credit challenges, maybe your first step is to focus on that.”

Leonard said many black Americans feel empowered by cryptocurrency because they have an equal chance at wealth.

Leonard said there are fewer systemic barriers — such as credit checks — to getting crypto loans as there are with bank loans. Investors can use their crypto assets as collateral in exchange for liquid funds. As long as the investors maintain the collateral and pay off the loans, they get the cryptocurrency back at the end of the term.

“It opens the door to equality,” Leonard said. “There are no long-standing cryptocurrency institutions setting the rules.”