It’s one of the oldest pieces of investing advice: Don’t invest in things you don’t understand.
Whether it’s private mortgages, leveraged ETFs, structured notes, or “infinite banking,” this is not a moral judgment. It is tried-and-true risk management – which happens to look a lot like common sense.
Crypto deserves the same treatment.
A paper published recently in The Journal of Consumer Affairs introduces something called the Crypto Literacy Scale in an attempt to measure what people actually know about how crypto works.
Deploying the quiz to more than 500 respondents representative of the general population in the United States yielded an average score of 41 per cent. Shockingly, nearly 15 per cent of people failed to identify a single correct answer on the multiple-choice quiz.
A 2023 report published by the Ontario Securities Commission found an average crypto asset knowledge score of 56 per cent for Canadians using a different quiz. According to a 2023 CFA Institute report, 57 per cent of Canadian Gen Z investors owned crypto.
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Earlier this year I wrote about how investors who hold crypto are not only associated with higher anxiety, but the psychological benefits of holding emergency funds are also diminished. Put this all together and crypto investments represent a real concern from a financial well-being perspective.
This is not an argument as to whether or not crypto (and everything that falls under that umbrella term) is a good investment. It is about the gap between how easy it is to buy crypto-related assets and how poorly the majority of people understand the very basics of the crypto world.
And when a gap between access and knowledge exists, two things flourish: bad decisions and bad actors.
Even if you’ve never touched crypto and plan to keep it that way, this may still be your problem. Scammers don’t care about your investment philosophy. They care about your confusion. That can be exploited.
A fake wallet-support e-mail or a slick “investment coach” on social media needs only one thing: a victim who doesn’t know what questions to ask. Even credible online personalities suffer from impersonators who create fake accounts to reel in the unwary. It’s a minefield.
(I have an impersonator on TikTok who has more followers than my actual account. My followers send me screenshots of their attempts to sell them crypto or entice them into various scams through direct messages, and yet try as I might, TikTok has refused to ban those accounts.)
The world of crypto is unusually unforgiving. A mistaken transfer can be permanent. A compromised key can be catastrophic. The consequences of ignorance arrive faster than they do in the traditional financial system.
However, it should be pointed out that having high crypto literacy does not mean you should invest in crypto. It merely means you are better equipped to make an informed choice if you decide to. It is the difference between walking into a casino with no knowledge of how gambling works versus walking into a casino after reading the rules, understanding the odds, and setting a strict limit.
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If someone wants to explore crypto exposure, the same old disciplines still apply. Diversification. Position sizing. Skepticism toward hot tips and promises of guaranteed returns. And humility.
The traditional financial services industry is now becoming better equipped to address questions about how crypto may or may not fit into a financial plan and investment policy statement. There are securitized products that trade on stock exchanges that offer ways to access the crypto world with the oversight and regulation the early proponents of decentralized financial systems abhorred.
Ironic, but that means there are professionals who can now provide guidance that investors could turn to. Again, that doesn’t mean crypto is prudent for everyone. It just respects the reality that Do-It-Yourself investing is more likely to work when you also “know yourself,” including your limitations.
Crypto literacy is starting to look less like a niche knowledge domain and more like a basic consumer protection need. We already accept that financial literacy is a public good. We want Canadians to understand interest rates, inflation, and the cost of debt.
Crypto literacy may be headed in the same direction, not because everybody should buy digital assets, but because everyone is now within easy reach of digital asset scams and missteps.
The most dangerous phrase in investing has always been “this time it’s different.” Crypto fans use it to justify optimism. But “if you don’t understand it, don’t invest in it” is still good advice. Crypto just raises the penalty for ignoring it.
Preet Banerjee is the creator of YourMoneyDegree.com, a modern financial literacy program with an AI companion app.