If you have been living under a rock for the last few years, then you might not know that everybody and their mama is buying Bitcoin and other cryptocurrencies.
Cryptocurrencies are forms of currency that can be exchanged digitally for goods and services. Bitcoin is the most popular one but other cryptocurrencies like Ethereum, Dogeoin, and Cardano have also gained popularity.
A lot of people might disagree with me on this topic, but I read one statistic that scares me. About 44% of those who own cryptocurrencies are people of color. This is a very high number considering how volatile the crypto market is.
A survey last summer by NORC.org at the University of Chicago found 13 percent of Americans reported having purchased or traded cryptocurrencies in the past 12 months. Of those, 44 percent were non-White, 41 percent were women and 35 percent had annual household incomes of less than $60,000.
The average trader was under age 40 and did not have a college degree, according to the survey.
Data show that while fewer Black Americans invest in stocks than White people, they are actually more receptive to holding cryptocurrencies. Buying a stock is buying a tiny ownership in a company. Buying crypto allows you to use it as a digital currency but it is not backed by an asset. What makes crypto so appealing is the chance to double or triple your money in a short period of time because of the hype compared to the average stock investment which returns between 8-10% annually.
Social media spaces like Clubhouse have become a gathering place for those looking to close the investing gap between the races through cryptocurrencies. But that comes with its own risk.
Here are my 5 reasons for not investing in bitcoin and other cryptocurrencies.
Let’s Remember The Dot Com Bubble of 2000
If you are familiar with the history of booms and busts in the stock market, then you should know all about the dot com bubble of the 90’s, leading to a bust in 2000. In the 90s, investing in the internet, .coms more specifically, was all the rave. Some companies made absolutely no money but simply had a .com and many investors poured millions into them in anticipation of them making money in the future.
New internet based companies were popping up everywhere. The value of the NASDAQ, home to tech stocks, grew from 1000 points in 1995 to more than 5000 in 2000.
Companies were asking huge prices for their stocks when going to the market and sometimes the value of those stocks would double on their first day. It seemed like anybody with an idea for an online business can easily make millions.
But the party came to an end. Many of the .com businesses were wiped out and even giants like Amazon lost 90% of its value. Investors were left in the dust of the crash, many losing their life’s savings.
New industries, like cryptocurrencies, usually start with a lot of excitement and euphoria around them. But, historically, a bad crash comes that filters out what is truly working and what’s not. If you get caught up in the hype and invest all of your money in these markets, the chances of you getting left in the dust when the crash happens is very high.
Governments Still Don’t Know Where They Stand on Bitcoin & Cryptos
Bitcoin is a decentralized currency, meaning it is not overlooked or managed by any government or centralized system. However, governments around the world can still play a big role in its success or downfall.
Some countries seem warmer to it while others are very wary due to the lack of control over it. Crypto has also become very popular in criminal activities, many hackers now asking for Bitcoin as a way or ransom payment.
These reasons make crypto unpopular with many governments. And when a government is wary of a new technology, it can set up new rules and regulations to limit the use of that technology. In that case, the value of Bitcoin and other cryptos might fall.
Bitcoin is Still Incredibly Volatile
If you’ve been following Bitcoin for a while, you know the prices of bitcoin can experience wild swings within days or even hours. As in any investment, this makes trading it a dangerous venture. On top of that, it trades 24 hours a day, 7 days a week, which can lead to some sleepless nights for those who have invested most of their money in this market.
This instability is common for young currencies and markets. At the end of 2017, Bitcoin was at $20,0000. In February of 2018, just within a couple of months, the price had dropped to below $7,000. Currently, Bitcoin is up above $40,000 and has even reached $60,000 recently, but it can easily crash to half of its price now within a few months again. So if you’re buying into it at any price point, the chance of rapid drops are very likely.
On top of that, research has shown that a large percentage of Black bitcoin owners have a net worth of under $60,000. That means many Black crypto investors might be putting money they can’t afford to lose in these very volatile markets.
The 2008 Housing Crash and The Black Community
It is no secret that Black people in the US have been systematically left out of building wealth for generations. For that reason, we are always looking for ways to catch up. And sometimes, we get caught up in booms and crashes at disproportionate rates. The 2008 housing crash is a prime example.
Black homebuyers were the biggest victims of predatory home loans during the housing boom. During the mid 2000s, banks and mortgage companies were giving out housing loans with flexible interest rates to attract unqualified home buyers. The monthly mortgage payments started out low and skyrocketed overtime. This left many homeowners unable to make their monthly payments while the housing market crashed. This meant the value of homes had dramatically dropped and foreclosures were the only options for many homeowners.
Now we know real estate is one of the most reliable ways to build wealth. But if you get caught up in a boom, it is very likely that you will also suffer when the bust inevitably comes.
I fear the same might happen with cryptocurrency. While investing is one of the many reliable ways to build wealth, getting caught up in a boom like we are seeing with crypto can be very dangerous. Since the black community is investing at disproportionate rates into Bitcoin, if a crash happens, we will also get hurt disproportionately.
Crypto is a non-productive asset
A productive asset, like owning a percentage of a company, has the ability to generate income outside of its stock price going up or down. Popular companies for investing like Coca cola, amazon, apple, and Microsoft all have products they produce or services they render. Which means, they generate income every year and a portion of that goes out to their investors through dividends. That’s on top of their stock prices going up annually most years.
Non-productive assets like cryptocurrency have no way of generating income. Their value is solely based on another person wanting to buy it from another. That’s the main reason why legendary investor Warren Buffet doesn’t like crypto.
On this subject, Darrick Hamilton, a professor of Economics and Urban Policy said, “It is true that the traditional financial systems have not provided access, and frankly exploited Black people. But the remedy isn’t to turn to another vulnerable system, however well-intended it may or may not be. The remedy is a public sector that ensures they have access in an equitable way.”