The Crypto Crash is Hitting Black Investors Hard

Reprinted from the Economist.com

When the dominoes fell, they fell swiftly. On May 11 shares in Coinbase, a cryptocurrency exchange plummeted after a bleak earnings report. The next day, Terra, one of the best-known stablecoins (cryptocurrencies pegged to a real-life asset, in this case, the dollar) crashed after losing its peg, triggering a sell-off across crypto markets. Within 24 hours, US$200billion (NZ$313b) had been wiped off the value of crypto assets.

The “crypto-crash” hit millions of investors. Some lost their life savings. The turmoil may have a particularly big impact on black Americans. They tend to earn less and have less savings than their white counterparts, on average.

A survey released last month by Ariel Investments and Charles Schwab, two financial-services companies, found that 25% of Black Americans own cryptocurrency, compared with 15% of white Americans. Young African-Americans are even more likely to have invested: almost two-fifths of those under 40 own cryptocurrency, compared with 29% of whites.

The Ariel-Schwab survey found that Black respondents were more likely to be both new to investing and highly enthusiastic about crypto: 23% said excitement about cryptocurrency was the reason they started investing; just 10% of white respondents said the same.

Black Americans are almost three times as likely to choose cryptocurrency as their first investment (11% versus 4%) and were twice as likely to describe it as the best investment overall (8% versus 4%). The survey also found that Black Americans were less likely to invest in conventional financial products–meaning their portfolios may be overexposed to crypto.

Many people are drawn into the cryptosphere by the thrill of its high risks and potential for high rewards. But Black Americans are typically cautious investors: surveys indicate that they have a lower appetite than average for risk. They are, however, almost twice as likely to describe cryptocurrencies as a safe investment. Fully 30% of black investors believe crypto is regulated by the government (14% of white investors thought the same). In reality, it is almost entirely unregulated. Last week Coinbase admitted that its customers would be unprotected if it went bankrupt. According to the US Federal Trade Commission, a consumer protection and antitrust authority, cryptocurrency fraud cost investors US$750m in 2021 (good old-fashioned credit-card fraud accounted for US$181m).

Cryptocurrencies may appeal to minorities who have tended to be warier of conventional investments than white investors are. According to the Ariel-Schwab survey, Black Americans are more likely to think stock markets are untrustworthy than white Americans (30% versus 23%). The same is true of financial institutions (28% versus 18%). Indeed African-Americans are more likely to say the stock markets are untrustworthy than trustworthy. The percentage of black Americans investing in shares is hardly higher than it was in 1998. But embracing crypto is a risky alternative.© 2022 The Economist Newspaper Limited. All rights reserved. From The Economist published under license. The original article can be found on www.economist.com