Bitcoin, Crypto and Reddit stock volatility shows trading doesn’t invest

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A reassuring aspect of the roller coaster ride that saw Bitcoin lose half of its value in less than two months is the immunity of the real financial world to the contagion of crypto tokens, which I increasingly see as UnfunnyNotMoney. But there is a danger that speculators, especially if they are young and inexperienced, react “once bitten, twice shy” to losses that could hurt their propensity to allocate money to long-term savings. .

Gamification of finance is a worrying trend, and it’s not just limited to buying and using digital currencies. The FOMO / YOLO crowd has embraced stocks as well, as we saw earlier this year with the rise and fall (and rise again) of GameStop Corp. and other Robinhood Markets Inc. favorites that have caught the attention of Redditors.

In February, legendary investor Charlie Munger said luring newbie investors to bet on stocks is a “dirty way” to take advantage of their inexperience. “This is most evident in the business dynamics of novice investors drawn to new types of brokerage operations like Robinhood,” said the vice president of Berkshire Hathaway Inc. “I think all of this activity is unfortunate. I think civilization would do better without it.

Stock retailing during pandemic-inspired lockdowns has grown, and not just in the United States The European Central Bank The Financial Stability Report released earlier this month noted that contracts for difference and equity swaps – popular ways of making leveraged bets on stocks and other securities – have jumped to nearly 15 trillion euros ($ 18 trillion) in March, more than double their value a year earlier.

Source: ECB

That’s even if IG Group Holdings Plc, which touts itself as the world’s largest provider of contracts for difference, states in its online marketing literature that 71% of its retail customers lose money by redeeming the product.

This astonishing figure highlights a lesson to remember: trading and investing are not the same thing. Buying and selling with the hope of making a quick profit is fundamentally different from putting money aside to build a long-term nest egg for the future.

Earlier this month, Fidelity Investments said it was letting teens as young as 13 open accounts at no cost, paving the way for the children of its existing clients to “learn by doing and foster meaningful family conversations. on financial matters, ”the Boston-based company said.

Given the ultra-low interest rates available on traditional money market accounts, it makes sense to try and educate young people about the larger universe of savings, including stocks, like my colleague Bloomberg. Opinion Brian Chappatta had an argument a few weeks ago. But there is a danger that the ability to run stocks without paying a fee – bid / offer spreads offer a somewhat opaque transaction tax – will make teens gamble rather than invest.

In addition, the youngest of the current generation of stock market investors have never seen the overall value of stocks fall more than brief periods. From late 2007 to early 2009, global equities lost 50% of their value and it took six years to regain the lost ground. Since then, the trend has been your benevolent friend. The 30% drop seen last year as the pandemic began to take shape has been very short-lived.

The only way is there?

In the wake of the global financial crisis, global stock values ​​have risen relentlessly

Source: Bloomberg


The global financial crisis has left deep scars on the collective psyche of investors, who have been wary of stocks. Consulting firm Oliver Wyman estimated in 2012 that a combination of loss of confidence in financial services and various investment barriers would leave the next generation of Western investors $ 15,000 worse a year.

It’s no wonder that regulators are paying attention to the dangers inherent in gamifying finance, even though it may mean restrictions on the democratization of money.

Securities and Exchange Commission Chairman Gary Gensler, testifying before Congress on May 6, said a report from his agency on this year’s retail frenzy will hopefully be ready by l ‘summer. One of the goals will be the trend among financial apps to introduce features that make securities trading appear to be like a video game, which it believes can cause users to buy and sell more frequently and to risk losing money more often.

The proliferation of companies offering trading platforms has made it easier to open accounts, Gensler said. But “we lost this human in the middle saying, ‘Is this appropriate?’ He warned.

The wild swings that have seen Bitcoin trading hit $ 65,000 and as low as $ 30,000 since mid-April will have surprised latecomers. But those who bought just a year ago have almost quadrupled their money, even after the recent drop.

This volatility obscures the central lesson on how capitalism in general and the securities markets in particular can help build wealth for the future. Treating trade and investment as similar avenues to financial security unduly elevates the former to the detriment of the latter.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

To contact the author of this story:
Marc Gilbert to [email protected]

To contact the editor responsible for this story:
Nicole torres at [email protected]



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