Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.
There is much work to be done in the cryptocurrency market before it reaches mainstream adoption and appreciation. Even though in roughly 11 years, it has gained a tremendous amount of ground. But there is still quite a lot of reservation when it comes to the retail market, it appears.
The Bank of Canada, the nation’s central bank, released a report in late August 2020 — which provides some interesting analysis on Canadian investors’ habits. Titled the “The Cash Alternative Survey”, it examined the public’s view on cash and the role it had to play. Additionally, it looked at hot topics such as central bank digital currencies (CBDCs) and digital payment methods.
But the stir in the cryptocurrency community arrives in the form of an interesting conclusion regarding financial literacy, which will be the subject of our discussion today.
Bitcoin and Financial Literacy
The most notable conclusion drawn by the report is as follows: those who are more financially illiterate are more likely to invest in digital assets than those who are literate. The Bank of Canada asked the surveyees the “Big Three” financial literacy questions — fairly simple questions for investors and traders.
The results showed that 47% of Canadians were financially literate. Of these, 93% had heard of cryptocurrencies, with only 4% investing in it. Of the 53% who were financially illiterate, 72% were aware of cryptocurrencies, with 8% investing in it.
Some have taken this to suggest that the financially illiterate are twice as likely to invest in cryptocurrencies. But this conclusion is far too tenuous based solely on the data provided by the CAS report. One useful insight provided by the report is that investment seems concentrated in the young, male, university-educated, or high-income demographic.
Personally, it seems as if the market has attracted a set of financially illiterate individuals who thirst for quick gains. There is ample evidence of many investors who are attempting to cash in on opportunities to make quick cash via pump and dump schemes.
This poses a risk for the market, as does the general volatility, and this keeps the financially literate away. Seasoned investors know better than to involve themselves in risks — and bubbles.
While there are risks in cryptocurrency, it seems as if they misunderstand what the market is about. Pump and dump schemes, and major volatility can take away from the core value proposition of Bitcoin.
Which brings us to the other reason why the financially literate don’t invest in cryptocurrencies: they lack cryptocurrency literacy.
Do the Financially Literate Understand Bitcoin?
Were the steps taken to show the financially literate that certain cryptocurrencies present seemingly sound money principles, they would potentially change their minds.
Take Michael Saylor, CEO of business intelligence firm Microstrategy, for example. Saylor was once a critic of Bitcoin, but he described how he had changed his views on digital assets once he had done the research. He nudged his colleagues to do the say, and they collectively felt that it would be a good investment to turn some of their cash into Bitcoin holdings.
Cryptocurrency has a bad reputation among incumbents because of all the incidents that have happened in its short lifespan. But similar incidents have occurred in the stock market too.
The market grows, matures, and becomes regulated. You have to ask if there is some fundamental value in Bitcoin and digital assets.
In that more literate world, investors would undoubtedly treat Bitcoin as a store of value, separate from other asset classes. It would be seen as a hedge against inflation against ominous fiscal policies and economic portendings.
It is true that many in the cryptocurrency market are in it to get-rich-quick. But it is also true that this behavior is slowly dissipating.
Bitcoin and some other major cryptocurrencies, are getting to the point where investors are holding for the long-term. Indeed, wallets holding between 0.1 BTC and 1 BTC have hit all-time highs this year.
The real issue here is the lack of understanding of cryptocurrencies. There is absolutely risk involved, but the high levels of risk alluded to have to do with cryptocurrencies, which are nothing like Bitcoin. Even then, there is data that shows an increasing number of investors are entering the cryptocurrency market — older generations too.
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird's US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firms specializing in sensing, protection and control solutions.