By Brett Arends
Young people were already feeling depressed about their future retirement prospects, according to polls.
Still more following the collapse of all their cryptocurrency bets, one suspects.
More than $1 trillion has been wiped off the notional value of cryptocurrencies such as Bitcoin, Ethereum and the like in just a few months according to a Washington Post report, citing data from industry website CoinMarketCap.com.
It’s 10 months since HBO talk show host Bill Maher called the crypto boom a “joke” and “Easter Bunny cartoon cash,” and urged his viewers to get out . Prices went up for a while before coming back down. Bottom line: Bitcoin is now a third lower than it was when Maher took the air, and Dogecoin, another cryptocurrency he highlighted, has fallen by more than half.
The losses fall heaviest on millennials, those in their 20s and 30s, because they are the most likely to own cryptocurrencies. According to a recent poll, about 31% of those aged 18 to 29 have used or bought a cryptocurrency, compared to just 8% of those aged 50 to 64.
The losses may also be felt more heavily among people of color , if a University of Chicago poll is to be believed. It found that 44% of cryptocurrency traders were from ethnic groups other than Caucasians, and 41% were women. “Cryptocurrencies are opening up investing opportunities for more diverse investors, which is a very good thing,” said UC’s Angela Fontes in July.
Millennials were already worrying about their retirement prospects even before the crypto rout.
Last July, 72% of them told the National Institute for Retirement Security that they were concerned they wouldn’t be able to achieve a financially secure retirement. Two-thirds said they were more anxious about their retirement prospects in the wake of the Covid crisis.
Millennials are supposed to face tougher prospects for retirement due to a confluence of factors, especially high student debt. However they are likely to benefit if the aftermath of the Covid crisis includes higher wages.
The latest slump in cryptocurrencies is nothing new. Their prices have soared and crashed repeatedly since they were first invented over a decade ago.
Fans can accurately say that all these currencies in total still sport a total notional value of $1.7 trillion, meaning that owners of cryptocurrencies have collectively “created” that amount of money out of nothing. Bitcoin’s price is still more than 6 times what it was 5 years ago.
But whether that wealth could be converted into genuine or “fiat” money—cash—is another matter.
Incidentally, claims that cryptocurrencies are a haven—“digital gold,” as some said—that can diversify or stabilize a portfolio have suffered something of a setback since the start of the year. While the S&P 500 /zigman2/quotes/209901640/composite SPY +2.45% stock index has fallen 7% and the U.S. bond index /zigman2/quotes/200660887/composite AGG +0.16% 2%, Bitcoin /zigman2/quotes/31322028/realtime BTCUSD +0.55% has, er, fallen 26%.
Meanwhile gold /zigman2/quotes/200593176/composite GLD +0.05% has risen 1%.
The standard argument in financial planning is that those who are young, in their 20s and 30s, can most afford to lose money on speculation and investments because they have the most time to recover. But the argument is flawed. Money lost on investments in your youth is arguably more costly than money lost later, not less costly.
That’s because when you’re young your investment dollars are much scarcer. And because it’s the money you invest when you’re young that really has time to grow into something big.
A single dollar invested at 30 and earning, say, 5% a year will grow to $5.50 by the time you’re 65.
Invested at age 50, it will grow to only $2 and change.
(A “real” investment return of 5% a year, meaning 5% above inflation, has been a long-term average from the stock market.)
What happens if the cryptocurrencies don’t recover? Likely answer: Finger-pointing, lawsuits, and largely pointless extra regulations.
As reported in the Washington Post article,
“The “crypto crash” has put pressure on Washington regulators to impose stricter rules on the industry — and raised fresh questions about the dangers of cryptocurrency for the average investor.
“You’re going to get more people calling their elected representatives, generally unhappy about crypto or feeling they were wronged in some way,” said Ian Katz, managing director of Capital Alpha Partners, a Washington policy analysis firm. “All regulators and members of Congress want to appear to be alert behind the wheel, and if this turns out to be a continued bloodbath, it increases the impetus for action.””
Among the ironies: One of the things crypto fans like about these currencies is their alleged freedom from the political and legal system.
Incidentally, it was much the same after the dot-com crash. Back then Washington ended up passing the Sarbanes-Oxley regulations, to “protect” ordinary people from financial fraud and the ruthless, rampaging capitalism they loved when they thought they were making money. I notice that these regulations didn’t seem to stop Bernie Madoff from continuing his fraud for years, and did nothing to stop the subprime bubble and subsequent financial collapse. On the other hand, from my direct experience I can report that the regulations were really, really good at discouraging analysts, economists and other financial experts from talking to the press.
As for crypto? Any young person who’s lost money should look at how much and multiply the figure by about 5. That’s how much the losses have taken out of their future retirement funds.