You were right. It’s not a passing trend. Despite the legal entanglements that businessmen like Sam Bankman-Fried are facing and the regulatory complications that companies like Binance are dealing with, people haven’t stopped buying cryptocurrencies. Although the price of Bitcoin suffered a devastating drop in 2022, the percentage of Americans who own cryptocurrencies, which was only 3 percent the previous year, increased to 11 percent. This year, that figure reached 12 percent, according to an article currently being researched by the National Bureau of Economic Research (NBER). On top of that, the price of Bitcoin has increased over 75 percent from its lowest point in 2022.
This conviction in cryptocurrencies- or simply curiosity- doesn’t deserve the disapproval of older generations or lectures about your personal finances. It just requires that you ask yourself a few questions to clarify who you are and why you’re so drawn to cryptocurrencies.
It’s true that young adults are more open to this way of putting their money to work. If you’re under 40, you’re more likely to own cryptocurrencies than someone over 60, according to NBER research. You’re also more likely to be male.
The gender gap is worth mentioning. This year, the Pew Research Center published an analysis showing that while 41 percent of surveyed men aged 18 to 29 said they had owned or used cryptocurrencies, only 16 percent of surveyed women in that age range had done the same.
One possible explanation for this bias is chemical. “It’s testosterone poisoning,” said 75-year-old retired neurologist and author of The Four Pillars of Investing, William Bernstein. “It’s great for muscle mass and reflexes, but it doesn’t help judgment at all.”
Are you the type who trades assets without thinking? That’s not a rhetorical question. Ask a woman or someone who has better judgment than you (or perhaps just different from yours).
The Pew Research Center also indicated that 14 percent of white adults had owned cryptocurrencies; in comparison, that percentage was 21 percent among black or Hispanic adults and 24 percent among Asian American adults.
The racial wealth gap is still very wide, and when young adults become aware of that difficult reality, they usually make a personal commitment to break the cycle. Unfortunately, any hasty decision can make you an easier target for questionable cryptocurrency promotion schemes run by influencers and celebrities.
“There’s a real desire to be able to catch up to others in the game of wealth accumulation in America,” said 33-year-old Yanely Espinal, director of outreach at the nonprofit educational company Next Gen Personal Finance. “So they sell you cryptocurrencies with this vision that, if you do this, you can achieve that level of wealth… as long as you’re willing to take the risk.”
The biggest appeal of cryptocurrencies is usually the possibility of making big returns, the kind of tenfold gains experienced by Bitcoin holders who bought in early 2019 and sold in early 2021.
But perhaps something like that will never happen again; in fact, it’s possible that the small number of people who achieved those gains were just lucky. To repeat such a feat (buying and selling at the right time) requires extraordinary skill (or, rather, it’s just as likely as lightning striking the same place twice).
However, I don’t intend to tell you not to try it for any reason. On the contrary.
Consider the trajectory of Aadi Gujral, the 17-year-old who founded the Foundation for Financial Literacy and started trading cryptocurrencies at the beginning of the pandemic. He bought Bitcoin and then delved into the industry, experimenting with other coins and mining as well.
“Sometimes it was very profitable, and other times I regretted all my decisions,” Gujral said. “With the volatility, my money probably would have been safer and better invested in an indexed fund with stocks.”
But would he have learned as much in a boring basket of the biggest US stocks? Would he have gained a better understanding of his own risk tolerance? Would he have become a better teacher to other young people his age? No, no, and no.
Espinal, who instructs educators on how to teach about cryptocurrencies and is the author of “Mind Your Money,” worries about teenagers who put all their savings into these types of currencies and lose everything.
“They might be left with a bad taste and keep their money in savings accounts because they don’t want to feel that way again,” she said. “That can steer them away from investing, which is a great opportunity to generate wealth, especially for people of color.”
Espinal is right to be concerned, and many young adults who saw their parents’ retirement balances suffer deep losses following the 2008 economic crisis stayed away from stocks for years. Avoiding them turned out to be the wrong choice during what became a steadily rising market.
For now, however, few cryptocurrency owners are suffering. Only 3 percent of them say their activity has greatly affected their finances, according to Pew research.
That could suddenly and unexpectedly change. However, all that means is that you shouldn’t invest more money in cryptocurrencies than you can afford to lose.
In Bernstein’s opinion, whose oldest grandson is 10 years old and will soon be ready to absorb his wisdom, the biggest mistake a cryptocurrency enthusiast can make is to think that owning them is a true investment. As he explained, investments provide returns (like a company you own shares in) or help you generate income (when the company pays dividends for its shares). Cryptocurrencies don’t do any of that unless you sell them for a profit.
You can think of the months or years that you hold cryptocurrencies as hours spent at a theater or a concert and only spend the amount you believe is worth the learning or enjoyment they provide.
But don’t underestimate people like Bernstein. “That’s the beauty of being an oldster,” he said. “Old people don’t invest as much in cryptocurrencies as young people do not because they’re out of touch but because they’ve seen this movie before, so they know how it usually ends.”
Ron Lieber has been the Your Money columnist since 2008 and has written five books, most recently “The Price You Pay for College.” More about Ron Lieber.