(C) Center for Economic & Policy Research
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No, crypto isn't the secret to building Black wealth. Here's why. [1]

['Michelle Singletary']

Date: 2023-04-26

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The idea that cryptocurrency will make you rich is appealing. But for many Black Americans, it’s also being pitched as the answer to decades of financial disenfranchisement. If you have a personal finance question for Washington Post columnist Michelle Singletary, please call 1-855-ASK-POST (1-855-275-7678) ArrowRight I’ve listened on Zoom calls and at seminars as promoters hawked the crypto revolution to Black folks, downplaying the risks of the deeply volatile asset. The industry has even co-opted luminaries like LeBron James, whose foundation partners with Crypto.com, to teach kids about cryptocurrency and the technology behind digital assets.

“Blockchain technology is revolutionizing our economy, sports and entertainment, the art world, and how we engage with one another,” 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.”

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But cryptocurrency is so speculative that investors, especially financially vulnerable ones, are simply better off buying low-cost, no-frills stock index funds.

“Crypto investing is extremely high risk,” Algernon Austin, director for Race and Economic Justice at the Center for Economic and Policy Research (CEPR), said during an interview about cryptocurrency investing and building Black wealth. “As an investment, it’s closer to gambling.”

Austin co-authored a report released earlier this year comparing crypto with index funds. When looking at a random sampling of 100 cryptocurrencies — all in the top 1,000 by market capitalization — Austin and his team found that the median cryptocurrency declined 46.6 percent from August 2017 to August 2022. But a total stock market index fund climbed 56.4 percent during that period, while an S&P 500 index fund surged 60.8 percent.

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Let’s put that in dollar terms.

If someone had purchased $1,000 worth of a cryptocurrency from the top 1,000 currencies in 2017, it would have lost nearly half its value over the five-year span, the report showed. “In contrast, if someone had purchased $1,000 worth of a total 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 appears to be more likely that someone will lose money investing in cryptocurrencies than will profit from it.”

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

Cryptocurrencies have outperformed index funds over shorter stretches of time, but the reward isn’t worth the risk long term, Austin said. Early investors in bitcoin have seen large returns, but today’s investors are buying high with stratospheric volatility.

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Although an index fund doesn’t guarantee profit — no investment does — it’s less risky and more appropriate for most investors.

The data is clear, Austin said, citing research by economists at the Bank for International Settlements showing that three-quarters of investors in bitcoin, the largest crypto by market capitalization, have lost money.

“The volatile price of cryptocurrencies prevents them from becoming widely used as a means of payment,” the researchers said in the 2022 working paper.

Here’s another major 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 with just 14 percent of White adults. Overall, data shows 17 percent of U.S. adults fall into one of these categories.

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But Pew found that Blacks are more likely than Whites to say they used cryptocurrency for the first time within the past year.

That’s disturbing, given the turmoil in the industry. The price of a bitcoin has nosedived from a high of $68,000 in November 2021 to about $27,000 this week.

Investors may be thinking: “Great, I’ll jump in now, buy low, and ride the wave up to wealth.”

Except there’s more to it than price.

There was the collapse of the celebrity-endorsed FTX cryptocurrency exchange. Sam Bankman-Fried, the FTX co-founder and chief executive, 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 the digitals, has been charged with fraud.

Pew found that 45 percent of Americans reported their investment performed worse than expected, compared with 15 percent who said it outperformed.

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Or, as Austin noted during our interview, just look at what JPMorgan Chase & Co. found when analyzing client data. Out of nearly 5 million checking account customers, more than 600,000 made transfers to crypto accounts.

It also found that lower-income investors were more likely to purchase digital currency at elevated 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 bought crypto at substantially higher prices,” the report said.

And, of course, Blacks are overrepresented among the nation’s low-income population, Austin pointed out.

Wealthier and more savvy investors in crypto, who are disproportionally White, have been able to get in and out at the right time. “The research suggests they’re profiting off lower-income investors,” he said.

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Let’s recap.

Promote it, and they will come. It’s been the mantra for crypto champions, many of whom are creating wealth for themselves by selling to less sophisticated investors who are ill-equipped to recover from major losses.

“The industry spent all this money on advertisements and all these celebrities to attract many people,” Austin said. “Index funds don’t do that. You don’t have basketball players and celebrities like Matt Damon doing commercials about index funds.”

Damon and James appeared in commercials for crypto.com with the tagline “Fortune Favors the Brave.”

Do you know what’s brave?

Ignoring the feverish cryptocurrency flimflam — including from seemingly well-meaning Black influencers — in favor of historically proven low-cost index funds. Sustained wealth is rarely sexy and sensational. It’s most often achieved through patience and prudence.

B.O.M. — The best of Michelle Singletary on personal finance If you have a personal finance question for Washington Post columnist Michelle Singletary, please call 1-855-ASK-POST (1-855-275-7678). Recession-proof your life: The tsunami of economic news is leading consumers, investors and would-be homeowners alike to ask whether a recession is inevitable. Regardless of the answer, there are practical steps you can take to help shield yourself from a worst-case scenario. Credit card debt: Carrying credit card debt is never good and you should ditch the habit. Here are seven ways to lower your credit card debt in light of the Fed continuing to raise interest rates. Money moves for life: For a more sweeping overview of Michelle’s timeless money advice, see Michelle Singletary’s Money Milestones. The interactive package offers guidance for every life stage, whether you’re just starting out in your career to living an abundant life in retirement. Test Yourself: Do you know where you stand financially? Take our quiz and read advice from Michelle.

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[1] Url: https://www.washingtonpost.com/business/2023/04/26/cryptocurrency-black-generational-wealth/

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