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Alternative Investments

Investing Is No Laughing Matter

Crypto’s promoters ignore the serious side of investing.

""Don Philips author illustration

Editor's Note: This article first appeared in the Q3 2022 issue of Morningstar Magazine. Don Phillips is a managing director at Morningstar. He is a member of the editorial board of Morningstar magazine.

How quickly things can change. As we entered 2022, it seemed like all the cool kids were into cryptocurrencies. Our favorite celebrities—Matt Damon, Tom Brady, and even Larry David—were presenting them as the next big thing, as something a hip athlete or movie star is into, or in the case of David, mocking those Luddites who are slow to grasp the game-changing merit of this hot new thing. We were all laughing along as their ads aired around this year’s Super Bowl, the most-watched television event on the planet. Who thought then that before Memorial Day we’d be reading horror stories of people who bought big on cryptocurrencies and now face the prospect of losing their houses or are even considering suicide because of crypto’s plunging prices? It’s been a cruel reminder that investing is no laughing matter.

Peer pressure is a dangerous guide for investment decisions. Yet ramping up such pressure has been a modus operandi of the cryptocurrency movement. When everyone else is laughing along with David, you want to be in on the joke. When fabulous celebrities tout the hip new thing, you want to be in on the trend. All this has ominous echoes of the tech-stock bubble of the late 1990s/early 2000, the last time the financial-services industry had such a large presence among Super Bowl advertisers. Then, it was tech-heavy mutual funds touting their digital expertise or online brokerages showing a hip young worker guiding his befuddled older boss through the process of making an online stock trade. Let’s light this candle! Then, too, the exuberance quickly turned to sorrow. The Nasdaq index peaked within days of the 2000 Super Bowl and didn’t recapture its highs for a decade and a half, wiping out many investors’ financial savings.

Playing the generational or age card is a particularly reprehensible way to promote an investment opportunity. We saw it in those tech-bubble ads, and we saw it again this spring when technology startup billionaire Peter Thiel chastised traditional Wall Street billionaire Larry Fink for not being hip enough to embrace cryptocurrencies more fully. Fostering a notion that you’ll miss the trend if you don’t act now may be fine in fashion, but it’s usually rotten investment advice. As Warren Buffett says, there are no called third strikes in investing. You get to see as many pitches as you like, and wise investors wait for the fat pitch they can hit the furthest with the greatest certainty. Those voices yelling “Hey, batter batter! Swing!” aren’t wise counsel; they are the opposing team, or in the case of investments, those parties trying to sell you something.

The peer pressure continues to grow, even as devastating tales about the volatile declines or outright collapses of various cryptocurrencies pile up. Most recently, an impressive array of crypto advocates crafted a manifesto of sorts urging the U.S. government to be supportive of cryptocurrencies and not burden this powerful innovation with excessive regulation. They asserted that America’s ability to compete in a global marketplace would be severely weakened if this innovation were curtailed. In their eyes, the very viability of our financial system and our global competitiveness rest on our collective ability to harness this technology. When senior executives from established, well-respected institutions like Fidelity Investments joined this chorus, it created the impression that crypto was an opportunity that our country is about to squander and that we all need to get on the bandwagon to remain global players.

Perhaps that’s right, but examining the list of signees, one is struck by how many of them are engaged in selling, rather than holding, cryptocurrencies. There’s a big difference in the economics of distributing versus buying an investment—and almost always the odds are better for the house than the customer. While these supporters may well be right that cryptocurrencies are a powerful innovation that will permanently alter how business is done, it doesn’t always follow that an important innovation makes a great investment, especially from the perspective of an individual investor with limited choices. The internet revolutionized how we shop, but I don’t see many investors smiling. If the promise of greater global competitiveness bears fruit, an investor could harness that benefit by owning a diversified portfolio of stocks. Plunging directly into cryptocurrencies with one’s own savings or retirement account is not necessarily the wisest way to participate. There is always more than one way to play any trend.

When investors are pushed into activities they don’t fully understand, that are untested, or that exceed their risk capacities, very bad things follow. Cryptocurrencies have all the hallmarks of an overhyped investment opportunity. That doesn’t mean that as an innovation they won’t be hugely important or that for some investors they may represent a worthy investment. Still, discretion may be the better part of valor here. Peer-pressure tactics to promote a service not only put those buying the service at risk, but they also often come back to haunt those applying the pressure as well. Financial services are a business based on trust. Violations of that trust are not easily forgotten. Cryptocurrencies may be the next new thing, but in another sense, they are just the latest test of the asset-management industry’s integrity. One thing we know for certain is that those firms that overpromote will probably fail this test.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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