The idea that cryptocurrency will make you rich is appealing.
No, crypto is not the secret to building black wealth. Here’s why.
“Blockchain technology is revolutionizing our economy, sports and entertainment, the art world and how we engage with each other,” the NBA superstar said in a statement announcing the partnership with the LeBron James Family Foundation. “I want to ensure that communities like the one I come from are not left behind.”
But cryptocurrency is so speculative that investors, especially financially vulnerable ones, simply are better to buy cheap, no-frills share index fund.
“Crypto investing is extremely high risk,” said Algernon Austin, director of racial and economic justice at the Center for Economic and Policy Research (CEPR), during an interview about investing in cryptocurrency and building black wealth. “As an investment, it’s closer to gambling.”
Austin co-authored a report released earlier this year comparing crypto to index funds. Looking at a random sample of 100 cryptocurrencies — all in the top 1,000 by market capitalization — Austin and his team found that the median cryptocurrency fell 46.6 percent from August 2017 to August 2022. But an overall stock market index fund rose 56.4 percent during of it. period, while an S&P 500 index fund rose 60.8 percent.
Let’s put it in dollars.
If someone had bought $1,000 worth of cryptocurrency from the top 1,000 currencies in 2017, it would have lost almost half of its value in five years, the report showed. “In contrast, if someone had bought $1,000 worth of an overall stock market or S&P 500 index fund, it would have increased to about $1,600,” the report said. “While it is possible to create significant wealth with cryptocurrencies very quickly, it seems more likely that someone will lose money investing in cryptocurrencies than make a profit.”
So no, cryptocurrencies are not helping blacks build generational wealth.
Cryptocurrencies have outperformed index funds over shorter time periods, but the reward is not worth the risk over the long term, Austin said. Early investors in bitcoin have seen great returns, but today’s investors are buying high with stratospheric volatility.
Although an index fund does not guarantee profits — no investment does — it is less risky and more appropriate for most investors.
The data is clear, Austin said, citing research by economists at the Bank for International Settlements that shows that three-quarters of investors in bitcoin, the largest cryptocurrency by market capitalization, have lost money.
“The volatile price of cryptocurrencies prevents them from being widely used as means of payment,” the researchers said in the 2022 working paper.
Here’s another big problem for today’s investors: Their timing is off.
In a recent Pew Research Center survey, 24 percent of Asian adults and 21 percent of black or Hispanic adults say they have invested in or used a cryptocurrency, compared to just 14 percent of white adults. All in all, data shows that 17 percent of American adults fall into one of these categories.
But Pew found that blacks are more likely than whites to say they used cryptocurrency for the first time in the past year.
That’s troubling, given the turmoil in the industry. The price of one bitcoin has fallen from a peak of $68,000 in November 2021 to around $27,000 this week.
Investors might think, “Great, I’ll jump in now, buy low and ride the wave to riches.”
Except it’s more than the price.
It was the collapse of the celebrity-endorsed FTX cryptocurrency exchange. Sam Bankman-Fried, co-founder and CEO of FTX, has been indicted on eight counts, including wire fraud and money laundering.
Crypto lenders Celsius Network and Voyager Digital filed for bankruptcy protection. Two major cryptocurrencies – TerraUSD and Luna – crashed, and Do Kwon, the founder of digitals, has been charged with fraud.
Pew found that 45 percent of Americans reported that their investment performed worse than expected, compared with 15 percent who said it performed better.
Or, as Austin noted during our interview, just look at what JPMorgan Chase & Co. found when he analyzed client data. Of nearly 5 million user account customers, more than 600,000 made transfers to crypto accounts.
It also found that low-income investors were more likely to buy digital currency at high prices than high-income individuals.
“Using bitcoin prices around the time of transfers to crypto accounts as a proxy for investment price, we find that lower-income households purchased crypto at significantly higher prices,” said the report.
And, of course, blacks are overrepresented among the nation’s low-income population, Austin pointed out.
Wealthier and more savvy crypto investors, who are disproportionately white, have been able to get in and out at the right time. “The research suggests they are profiting from lower-income investors,” he said.
Promote it and they will come. It is has been the mantra of crypto-masters, many of whom create wealth for themselves by selling to less sophisticated investors who are ill-equipped to recover from large losses.
“The industry spent all this money on advertising and all these celebrities to attract a lot of people,” Austin said. “Index funds don’t do that. You don’t have basketball players and celebrities like Matt Damon running commercials about index funds.”
Damon and James appeared in commercials for crypto.com with the tagline “Fortune Favors the Brave.”
You know what’s brave?
Ignoring the frenzied cryptocurrency flimflam – including from seemingly well-intentioned black influencers – in favor of historically proven low-cost index funds. Enduring wealth is rarely sexy and sensational. It is most often achieved through patience and prudence.
