Crypto Is Not The Key To Black Generational Wealth

© Illustration by Kat Brooks/The Washington Post; The cryptocurrency iStock is so speculative that investors, especially financially vulnerable black investors, are better off buying stock market index funds on the cheap.

The idea that cryptocurrencies will make you rich is tempting.

But for many Black Americans, it is also seen as a response to decades of financial hardship.

I've listened to Zoom calls and seminars as promoters educate Black people about the cryptocurrency revolution, downplaying the risks of a highly volatile asset. The industry has even attracted celebrities like LeBron James, whose founder partnered with Crypto.com to teach kids about cryptocurrencies and the technology behind digital assets.

"Blockchain technology is revolutionizing our economy, sports and entertainment, the world of art and the way we interact with each other," the NBA superstar said in a statement announcing the partnership with LeBron James Family Foundation. "I want to make sure communities like the one I'm in aren't left out."

But cryptocurrencies are so speculative that investors, especially those who are financially vulnerable, are simply better off buying simple, low-value index funds.

"Investing in cryptocurrencies is extremely high risk," Algernon Austin, director of racial and economic justice at the Center for Economic and Policy Research (CEPR), said in an interview about investing in cryptocurrencies and black wealth creation. "As an investment, it's closer to gambling."

Americans view cryptocurrency investments as unreliable. They are right.

Austin co-authored a report released earlier this year comparing cryptocurrencies 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 average cryptocurrency fell 46.6% between August 2017 and August 2022. But the overall value index market share rose 56.4% during that period. period, while the S&P 500 index fund rose 60.8%.

Let's express it in dollars.

According to the report, if someone bought $1,000 worth of cryptocurrencies in the top 1,000 coins in 2017, they would lose almost half of its value over a five-year period. "Conversely, if someone buys a $1,000 stock market mutual fund or S&P 500 index fund, it will go up to about $1,600," the report said. "Although it is possible to amass a significant fortune very quickly with cryptocurrencies, it seems more likely that someone will lose money investing in cryptocurrencies than benefit from them."

So no, cryptocurrencies are not helping Black people build generational wealth.

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Cryptocurrencies have outperformed index funds in shorter periods, but the rewards are not worth the risk over the long term, Austin said. Early Bitcoin investors made huge profits, but today's investors are buying at high prices with the height in volatility.

Although an index fund does not guarantee returns like any other investment , it is less risky and more suitable for most investors.

The data speaks for itself, Austin said, citing a study by economists at the Bank for International Settlements showing that three-quarters of investors in bitcoin, the largest cryptocurrency by market capitalization, lost money.

"Cryptocurrency price volatility hinders its widespread use as a means of payment," researchers said in a 2022 paper.

Here's another big problem for investors today: Your time is not fixed.

In a recent Pew Research Center survey, 24% of Asian adults and 21% of Black/Latino adults said they have invested or used cryptocurrency, compared to 14% of white adults. Overall, data shows that 17% of American adults fall into one of these categories.

But Pew found that blacks are more likely than whites to say they are using cryptocurrency for the first time in more than a year.

Six Signs Crypto Investment is a classic Ponzi scheme.

This is worrying given the turbulence in the industry. The price of bitcoin has fallen from a peak of $68,000 in November 2021 to around $27,000 this week.

Investors might think, "Okay, now I'm going to jump in, buy low and ride the wave to riches."

But it's not just about the price.

Celebrity-backed cryptocurrency exchange FTX has collapsed. Sam Bankman-Fried, co-founder and CEO of FTX, was charged with eight counts, including fraud and money laundering.

Crypto lenders Celsius Network and Voyager Digital have filed for bankruptcy. Two major cryptocurrencies, TerraUSD and Luna, collapsed and the founder of the digital currency, Do Kwon, was accused of fraud.

The collapse of Signature Bank spells trouble for the cryptocurrency industry

Pew found that 45% of Americans reported that their investments performed worse than expected, compared to 15% who said they performed better.

Or, as Austin pointed out during our interview, just look at what JPMorgan Chase & Co. discovered by analyzing customer data. Of nearly 5 million checking account customers, more than 600,000 have made transfers to crypto accounts.

It has also been found that low-income investors are more likely to buy digital currency at inflated prices than high-income individuals.

"Using bitcoin prices during transfers to crypto accounts as a proxy for investment price, we found that low-income households purchased cryptocurrencies at significantly higher prices," the report said.

And of course, blacks dominate the country's low-income population, Austin noted.

SEC accuses two crypto platforms of risk non-disclosure

The wealthiest and most sophisticated cryptocurrency investors, who are disproportionately white, have been able to jump in and out at the right time. "Research shows that low-income investors benefit," he said.

Let's summarize.

Promote and they will come. This has been the mantra of cryptocurrency champions, many of whom have made their fortunes by selling to less experienced investors unwilling to recoup huge losses.

"The industry spent all this money on advertising and all these celebrities to get as many people as possible," Austin said. "Index funds don't do that. There are no basketball players and celebrities like Matt Damon filming commercials for index funds.”

Damon and James starred in an ad for crypto.com with the tagline "Fortune favors the brave."

Do you know what courage is?

Ignore the raging cryptocurrency hype, even from seemingly well-intentioned black influencers, in favor of historically proven low-fee index funds. Sustainable wealth is rarely sexy and sensational. Often this is achieved with patience and discretion.

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