Black Investors Burned by Bitcoin

Two years ago, a Maryland-based IT professional — who asked to remain anonymous for reasons that will become clear in a minute — began seriously investigating bitcoin. He had seen the ads for it all over the place, he told me. He had a background in computer science and was interested in cryptography. He saw the promise of blockchain, Bitcoin’s distributed ledger. And he had watched the amazing rally in the value of bitcoin and other cryptocurrencies. “I wanted to see how far it would go,” he said.

He put $1000. Shortly after, cryptocurrency markets began to weaken. He started losing money and decided to withdraw rather than risk losing more. “I got a good idea what it was all about,” he said.

The IT professional is one of thousands of American investors who have seen their savings disappear into thin air as bitcoin and other cryptocurrencies enter not only a bear market, but what many Web3 proponents call a “crypto winter.” The price of a single bitcoin has fallen from a peak of more than $68,000 last November to around $16,000 today; Earlier this month, the shock collapse of crypto-trading firm FTX sent prices even lower than they were in 2017. Cryptocurrencies as a whole lost more than $2 trillion in paper value last year.

The Maryland man is also one of thousands of black investors who have seen the value of their crypto investments plummet. The prototypical face of cryptocurrency is young, white, techie, and male, but perhaps no other demographic group has been hit harder than black Americans, who are half as likely, but significantly more, to own stocks as their white counterparts. owns cryptocurrencies. Many of these investors are now in the red as black investors flocked at or near the most recent top of the cryptocurrency market.

This is particularly troubling because black investors had little to lose to begin with: Young black men are among the poorest segments of American society. It’s also worrisome because many black investors poured money into bitcoin in the first place because they found it too difficult to build generational wealth. Discriminated by banks, ignored by investment managers, redlined and saddled with student debt, many turned to more esoteric opportunities.

The IT professional understood the potential downsides. “I don’t lose money I can’t afford to lose,” he said, explaining to me that he studies dollar-value averaging, is a fan of index funds and subscribes to Benjamin Graham’s ideology of value investing. “I don’t have time to pick stocks; I’m not a magician.” He added that Bitcoin was a curiosity for him, not something he was ready to retire from.

But many have exposed themselves to a level of risk that isn’t entirely transparent and that they can’t really afford – although it’s impossible to say exactly how many people have lost money and how badly off they are. Indeed, researchers have scant data on who owns cryptocurrencies, and even less on demographics and the distribution of gains and losses.

However, surveys show that black investors have been eagerly getting into crypto, but of late. Black Americans were less likely than their white counterparts to have heard of cryptocurrencies in the early days, rather than invested in them. (In 2015 Atlantic “Why Are So Few Black People Using Bitcoin?” published a story titled) This was true until the late 2010s, when bitcoin gained in value and markets for coins, tokens, and other types of NFTs. digital assets began to explode. According to data provided to me by the Federal Reserve Bank of Atlanta, 10.4 percent of black consumers owned cryptocurrency in 2021, up from 7.4 percent in 2020. Before that, its “Consumer Payment Choice Diary” survey had too few respondents to form a firm estimate. .

By 2021, it was Black Americans more they own more crypto than their white counterparts. According to a study from the Federal Reserve Bank of Kansas City, they held more cryptocurrencies than stocks or mutual funds. Then the cryptocurrency market crashed. John W. Rogers, founder of the mutual fund firm Ariel Investments and a famous black investor himself, told me, “We saw the same thing happen with the Internet bubble when many African-American first-time investors chased hot Internet stocks.” “A lot of people have made that much money over the last seven or eight years, and it’s only natural to get caught up in yesterday’s work.”

Of course, perhaps, it is also expensive. And tragic, in the assessment of law professor and author Mehrsa Baradaran The Color of Money: Black Banks and the Racial Wealth Gap. “There’s a real desire in the black community to have financial autonomy,” he said. “The system is not working. And the only way is to start the system. But if you are a minority, it was a struggle that has yet to pay off.

Indeed, cryptocurrency has had practical appeal for small-dollar investors from historically marginalized communities: You can buy bitcoin on the Cash App without a credit check. It also had obvious financial appeal. A survey conducted earlier this year by Charles Schwab and Ariel Investments found that a quarter of black investors expected to earn 20 percent or more annually on their cryptocurrency investments. dollar fortune from almost nothing. (The Schwab and Ariel survey also found that many crypto investors do not fully understand that they are buying a risky, unregulated product.)

Crypto has also appealed to many black investors who do not trust traditional finance. They had good reason for their skepticism: Traditional financial institutions charged blacks more for mortgages, undervalued their homes, denied them high-interest loans and jobs, and continued to transform their communities.

Many black investors have read headlines promising cryptocurrency as an engine for racial equality, seen constant ads for coin offerings and NFTs, and watched NBA players and NFL stars start getting paid in bitcoin. (In this year’s Super Bowl ad, LeBron James tells a teenage version of himself: “If you want to make history, you gotta call your own shots.”)

None of this would matter if it weren’t for the upheavals of the business cycle and the sudden catastrophe of the coronavirus pandemic. The flocking of black investors to bitcoin and the like has coincided with a sharp rise in real wages among black workers. It also coincided with the distribution of stimulus checks, child-tax-credit payments and expanded unemployment-insurance payments. (The Federal Reserve Bank of Cleveland found that the COVID stimulus checks led to a spike in the price of bitcoin.) Millions of people who had never had much to save or invest suddenly had cash on hand, and many chose to move it into cryptocurrency.

But when interest rates rose, the broader tech sector went into recession and the bubble burst as new buyers dried up. “These are not really investable assets,” Ariel Investments’ Rogers told me. “It is not a farm that produces wheat. It’s not technology like the Apple computer that changed the world. You just buy them in the hope that someone else will pay a higher price for them.”

Now, especially after the collapse of FTX, few people are willing to pay higher prices. Of course, the cryptocurrency market has repeatedly boomed and busted over the past 10-plus years, and many Black investors can see their losses turn into gains over time. But the safest way to generate cryptocurrency is to buy early; shoot-the-moon paydays may be a thing of the past. And recent surveys show that black Americans’ share of bitcoin ownership has dropped sharply, suggesting many people are buying high and selling low.

In order to protect individual investors of all races in the long run, the government should strictly regulate cryptocurrency in the public interest. (The current lack of regulation helps keep digital currency speculation separate from the traditional financial system. Passing industry-friendly cryptocurrency regulations in Congress would in some ways be the worst of both worlds.) Black families also need better ways to build wealth. which are supported by extensive public investment. As for the Maryland IT professional, he works with bitcoin, but not crypto. He told me he was still holding dogecoin for a lark. “Five hundred dollars gets you 50 million coins,” he said. “This is purely speculative. It has no real value.”

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