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When it comes to cryptocurrencies like bitcoinsnew investors are often motivated by friends to take the plunge, according to a new study.
But that could have traps for the unwary, experts warn.
"I don't imagine that friends are talking about when they lost money," he said baker readscertified financial planner and founder of Apex Financial Services in Atlanta.
"Sexy sells," added Baker, a member of CNBC's Advisory Board. "The positive side sells.
"But people don't talk about the disadvantages," he added.
Nearly a third, 31%, of new cryptocurrency investors in 2022 used a friend's suggestion as their primary reason for buying, according to a recent joint study. study published by the Financial Industry Regulatory Authority Investor Education Foundation and NORC at the University of Chicago. Recommendations from friends were the number one motivating factor for new cryptocurrency buyers.
That share compares with 8% for new investors in more traditional assets like stocks and bonds.
The disparity indicates that there is “a social element to investing in cryptocurrency that is not evident in investing in stocks or bonds,” according to the study.
This is not to say that a friend's recommendation is necessarily a bad reason to buy digital assets.
But it can be a "double-edged sword," said Gary Mottola, director of research at the FINRA Investor Education Foundation and co-author of the report.
For one thing, cryptocurrencies can be an on-ramp to more traditional investments, which is generally a good outcome, Mottola said. There is some evidence of this happening: 36% of new crypto investors said their purchase made them more interested in investing in the stock market, the study found.
However, "friends who recommend [crypto]sources of information on social media may not be reliable," Mottola said.
trust but verify
The fear of missing out can be a powerful driver of investment decisions.
Bitcoin and other crypto assets rallied through 2021, a record year for digital assets. Bitcoin jumped from roughly $10,000 in the summer of 2020 to a peak of over $68,000 in November 2021.
But the tide turned quickly during the so-called "crypto winter," when investors lost over $2 billion in the year following the market peak.
The sexy sells. Advantage sells. But people don't talk about the downside.
baker reads
CFP and founder of Apex Financial Services
Celebrities, such as actress Lindsay Lohan and rapper Soulja Boy, were recently fined by the Securities and Exchange Commission for undisclosed endorsements of various cryptocurrencies.
"Unless you're a financial person with legitimate knowledge, trust but double check," Baker said of information you may hear from friends or "pseudo experts" on social media.
One of the dangers of taking a friend's advice: Investors may not understand the risks and volatility associated with cryptocurrencies (or other investments), or how they fit into a larger, well-diversified investment portfolio, he said. .
Another potential pitfall: You might get a friend's recommendation when the market is nearing its peak, when much of the potential for growth has already been realized.
Bitcoin's current value, around $30,000, is nearly double what it was in early 2023. Baker expects more cryptocurrency phone calls soon if the trend continues.
"If you're investigating [about crypto]"I think it's great," Baker said. "If you're just blindly taking information without doing any research, that's a horrible idea."
