The black investors who got burned by Bitcoin
Two years ago, a Maryland-based information technology specialist — who asked to remain anonymous for reasons that will become clear in a minute — began researching bitcoin in earnest. He had seen the ubiquitous commercials for it, he told me. He had a background in computer science and was interested in cryptography. He saw the promise of the blockchain, bitcoin’s ledger for distributed transactions. And he had seen the astonishing rise in the value of bitcoin and other cryptocurrencies. “I wanted to see how far it would go,” he told me.
He put in $1,000. Shortly thereafter, the crypto markets began to falter. He started losing money and decided to pull out rather than risk losing more. “I got a good sense of what it was all about,” he told me.
The IT specialist is one of thousands of American investors who have seen their life savings disappear into the ether as bitcoin and other cryptocurrencies have entered not just a bear market, but what many Web3 supporters are calling a “crypto winter.” The price of a single bitcoin has plunged from a peak of more than $68,000 last November to around $16,000 today; the shock collapse of crypto trading firm FTX earlier this month sent prices lower than they were in 2017. Cryptocurrencies as a whole have lost more than $2 trillion in paper value in the past 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 crypto is young, white, techie and male, but perhaps no other demographic has been hit harder by the crypto bust than black Americans, who are half as likely to own stocks as their white counterparts, but significantly more likely to own cryptocurrencies. Because black investors piled into the crypto market at or near its recent peak, many of these investors are now in the red.
That’s especially troubling because black investors had so little to lose to begin with: Young black men are one of the poorest segments of American society. It’s also worrying because many black investors poured money into bitcoin because they found it so difficult to build generational wealth in the first place. Discriminated by banks, overlooked by investment managers, redlined and saddled with educational debt, many turned to more esoteric opportunities.
The IT specialist understood the potential downside. “I don’t lose money I can’t afford to lose,” he told me, explaining that he is a practitioner of dollar-cost averaging, a lover of index funds and a subscriber to the value investing ideology of Benjamin Graham. “I don’t have time to pick stocks; I’m not a magician.” Bitcoin, he added, was a curiosity for him, not something he was willing to bet on in retirement.
But many others exposed themselves to a level of risk that wasn’t entirely transparent and that they really couldn’t afford – although it’s impossible to pinpoint exactly how many people lost money and how badly they fared. Indeed, researchers have scant data on who owns cryptocurrencies, and even less data on the demographics and distribution of gains and losses.
That said, research shows that black investors entered crypto with gusto, but late. Black Americans were much less likely than their white counterparts to have heard of cryptocurrencies in the early days, let alone invested in them. (In 2015, The Atlantic published a story headlined “Why Are So Few Black People Using Bitcoin?”) That was true until the late 2010s, when bitcoin rose in value and the markets for coins, tokens and NFTs—other types of 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 crypto in 2021, up from 7.4 percent in 2020. Before that, the Diary of Consumer Payment Choice survey had too few respondents to generate a solid estimate.
As of 2021, black Americans were more more likely than their white counterparts to own crypto. They were also more likely to own crypto than stocks or mutual funds, according to a study by the Federal Reserve Bank of Kansas City. Then the crypto market fell apart. “We saw the same thing happen with the Internet bubble, when we saw a lot of African-American first-time investors chasing hot Internet stocks,” John W. Rogers, the founder of mutual fund firm Ariel Investments, and a notable black investor himself. , told me. “So many people have made so much money in the last seven or eight years, and it’s natural to fall into the trap of chasing what worked yesterday.”
Natural, perhaps, but also expensive. And tragic, in the assessment of Mehrsa Baradaran, law professor and author of The Color of Money: Black Banks and the Racial Wealth Gap. “In the black community, there’s a real yearning to have financial autonomy,” she told me. “The system is not working. And the only way is to make the system work. But if you are a minority, it has been a struggle that has yet to bear fruit.”
In fact, crypto 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 economic appeal. A survey conducted by Charles Schwab and Ariel Investments earlier this year found that a quarter of black investors expected to earn 20 percent a year or more on their investments in crypto—a not entirely fanciful assumption, given that many of crypto’s early investors showed billion- dollar fortunes out of next to nothing. (The Schwab and Ariel survey also showed that many crypto investors did not fully understand that they were buying a risky, unregulated product.)
Crypto also appealed to many black investors who distrusted traditional finance. They had good reason for their suspicions: Traditional financial institutions charge black people more for mortgages, appraise their homes for less, deny them loans and overpriced jobs, and continue to clean up their communities.
Many black investors also read headlines promising crypto was an engine for racial equality, saw constant ads for coin offerings and NFTs, saw NBA players and NFL stars start taking their paychecks in bitcoin. (In a Crypto.com Super Bowl ad that aired this year, LeBron James tells a teenage version of himself, “If you want to make history, you’ve got to try your own shots.”)
None of this might have mattered if not for the vicissitudes of the business cycle and the sudden catastrophe of the coronavirus pandemic. The surge in black investors piling into bitcoin and the like coincided with a sharp increase in real wages among black workers. It also coincided with the distribution of stimulus checks, child tax credit payments and extended unemployment benefit payments. (The Federal Reserve Bank of Cleveland found that 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 push it into crypto.
But the bubble burst as interest rates rose, the broader technology sector entered a recession, and new buyers dried up. “These are not really investable assets,” Rogers of Ariel Investments told me. “It is not a farm that produces wheat. It is not technology, like an Apple computer, that changes the world. You just buy them in the hope that someone else will pay a higher price for them.”
Few people are willing to pay higher prices now, especially after the FTX debacle. Sure, the crypto market has boomed and busted and boomed and busted again and again over the last dozen-plus years, and many black investors can see their losses turn into gains over time. But the surest way to build a crypto fortune is to have bought early; shoot-the-moon paydays may be a thing of the past. And recent polls show a sharp decline in the share of black Americans who own bitcoin, indicating that many may have bought high and sold low.
To protect individual investors of all stripes in the long term, governments must strictly regulate crypto in the public interest. (The current lack of regulation helps keep digital currency speculation separate from the traditional financial system. Congress passing industry-friendly crypto rules would in some ways be the worst of both worlds). Black families also need better avenues to build wealth, ones supported by broad government investment. As for the Maryland IT specialist, he’s done with bitcoin — but not with crypto. He still has dogecoin for a lark, he told me. “Five hundred dollars gets you 50 million coins,” he said. “It is purely speculative. There is nothing of real value.”
