Hard lessons from the crypto crash
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This article is the latest part of the FT’s Financial Literacy and Inclusion Campaign
We deal with all kinds of financial problems on the Money Clinic podcast, but after speaking to young traders who lost their shirts in the $40bn wipeout of crypto token luna, I found it hard to offer them any solutions.
Subbaiah, 29, got into crypto last year after seeing his friends make money. The IT worker in Bangalore watched tutorials by online influencers, started trading in and out of various coins and made enough to dream about quitting his day job and trading full-time.
Unfortunately, this early success gave him the confidence to borrow on credit cards to boost his trades. Tempted by the prospect of a 20 per cent yield, he moved his entire $7,000 portfolio into luna — only to see it reduced to $150 when the coin’s value collapsed this month.
“I thought I could make money easily,” he tells me on the podcast this week. “I never thought about the downside, that everything could go to zero.”
Not only is Subbaiah’s money lost, the credit card debt will be a lasting reminder of how this was a risk he couldn’t afford to take.
You might have limited sympathy for those who have been financially reckless, trading unregulated and volatile crypto assets in an attempt to get rich. In the UK, regulators have consistently warned: “Be prepared to lose all of your money.” So why has this come as a surprise?
Yet, glance through the tales of woe on Reddit threads topped with suicide helplines, and only those with hearts of stone will fail to question what more we should be doing to protect young consumers from financial harm.
Financial regulators are still struggling with how to respond, but there are also serious questions for platforms (those that enable crypto trading as well as social media platforms). As the gatekeepers to the crypto kingdom, they’re profiting from this craze, and should better police it.
However, even the outgoing chair of the UK’s Financial Conduct Authority admitted last week that harsh warnings were not putting young people off. Charles Randell recently visited a school near the FCA’s east London headquarters, and chatted to a group of 13- and 14-year-old students about the risks of crypto.
They accepted it was “like gambling”, but nevertheless still believed they could make money. “They were very able students, but the hope of getting rich was stronger than any facts or rational arguments I could give them,” he said.
“With celebrities as varied as Kim Kardashian and Larry David willing to take money to promote speculative crypto, how do we curb people’s enthusiasm to do something that may seriously harm their financial lives?”
Crypto may be risky and unregulated, but it’s impossible to avoid. Even if young investors are aware of the FCA’s warnings, they’re much more likely to have seen influencer endorsements on social media, crypto ads on the side of buses or taken part in “play to earn” online games such as Axie Infinity.
Last year, FCA research estimated that 2.3mn British adults owned some form of crypto asset, which is not far off the numbers who invest in stocks and shares Isas. Although most crypto holders knew their investments were not protected, more than one in ten believed otherwise.
There’s rising evidence some people who have lost money on their crypto investments mistakenly think they could be entitled to compensation.
The UK’s Financial Services Compensation Scheme (FSCS) tells me that “crypto” is one of the most searched-for terms on its website — yet it’s not a product it covers. In response, the FSCS has created educational content about what to consider before you invest in crypto, including its “Protect your money” podcast.
This is commendable — but could better financial education really discourage people from taking huge risks to get rich quick? One of Money Clinic’s podcast experts, professional investor Ilan Solot, believes that it can.
“We need to be preparing young people for a financial world where they’re going to be offered situations with high leverage, and people on YouTube saying you can earn 20 per cent and there’s no risk,” he says.
I’m a big believer that we need to start doing more in schools. The FT’s Financial Literacy and Inclusion Campaign (FLIC) has devised a school workshop about risk including a “higher or lower” game — similar to the 1980s British TV show Play Your Cards Right — where we challenge teenagers to predict short-term crypto price movements.
In my role as a FLIC trustee, I am often required to pose as the late flamboyant presenter Bruce Forsyth. One lucky student is selected to guess as their classmates bellow “higher!” or “lower!” (they frequently get it wrong, which is embarrassing, but less costly than doing so in real life).
Once, a student thought the answer was lower, but I influenced him to change his mind by repeatedly asking “Are you sure?”
When I revealed the correct price was substantially lower, he was rightly miffed: “But Miss, you told me it would go up!”
But here’s the thing: how can anyone guarantee that you’ll make money? As I told the students, if I were an influencer on TikTok telling them to buy this coin, what recourse would they have if they lost all their money? Correct answer — none — and gold stars awarded.
There are other regulated activities that older students could legally try that are risky and financially harmful, such as spread betting, day trading or gambling, yet some protections exist.
The UK has (finally) banned punters from gambling using credit card payments; spread betting sites must carry prominent warnings about the high numbers of customers who lose money and the FCA has clamped down on the amount of leverage unsophisticated investors can use. Meanwhile, the crypto world remains a free-for-all.
The first rule of gambling is never to bet more than you can afford to lose, but crypto investors should also heed traditional investment “rules” such as diversification.
Contrast Subbaiah’s experience with that of 34-year-old Money Clinic podcast listener Dan. He holds crypto, but kept this under 15 per cent of his wider portfolio. While he steered clear of leverage (and luna) he’s still seen the value of his crypto holdings fall by several thousands of pounds in the latest sell-off.
He’s not happy about this — but it hasn’t cost him his financial resilience. He’s not a forced seller and (to coin a phrase beloved of crypto investors) he can “hold on for dear life” and hope for a bounce.
You might think they’re nuts for investing in crypto, but I am hugely grateful to our podcast guests for bravely sharing their experiences of losing money. With all of the hype merchants promising you can trade your way to riches, talking about the realities of going broke may be the most powerful educational tool for young investors who are tempted to take a punt.
Claer Barrett is the FT’s consumer editor: firstname.lastname@example.org; Twitter @Claerb; Instagram @Claerb
Letter in response to this article:
We need to take young consumers back to basics / From Steven M Richman, Princeton, NJ, US