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Just who invests in cryptocurrency, anyway? In a recent NYT column, Nobel-laureate economist Paul Krugman highlights data showing that crypto traders are more likely to be nonwhite, noncollege, and lower-income than stock traders. (The New York Times) |
NH: Many people assume that cryptocurrency investors are primarily white, affluent, and educated. And indeed, many of crypto’s most vocal celebrity supporters match that description. But is this an accurate description of most crypto traders?
This op-ed by Paul Krugman, which draws on data from NORC and Gallup, says no. Krugman argues that while traditional investors do indeed tend to be highly educated, older, wealthy, and white, crypto investors are different: They are not only younger, they are also much more likely to be nonwhite, lower-income, and less educated.
For this reason, he suggests, crypto is on its way to becoming "the new subprime"--that is, the next example of naive investors getting lured to assume risks they don't understand and aren't prepared to bear. “Many vulnerable families," he warns, "may end up paying the price.”
Needless to say, Krugman is the perfect lightning rod for drawing the wrath of crypto fans. How fitting, they rejoin, that a progressive member of the hyper-educated elite would decry the sight of the unwashed rushing to invest in something that hasn't yet won official approval!
But let's ignore where Krugman may or may not be going with his argument. Let's focus instead on the facts he brings to the table. Let's explore what we know about the demographic profiles of stock traders versus crypto traders.
Who owns stocks?
Last year, Gallup conducted a poll on personal stock ownership. Respondents were asked if they own individual stocks “as well as stocks included in a mutual fund or retirement savings account.”
The results showed that stock ownership is somewhat higher among men than women and much more lopsided toward adults over age 30, whites, the educated, and the affluent. A 2020 Pew survey showed similar results.
OK. Now who owns crypto?
According to a 2021 Pew survey, minorities are the most likely to have ever owned cryptocurrency: Asians 23%, Hispanics 21%, blacks 18%, and whites 13%.
Similarly, NORC found that 44% of crypto owners in 2021 were nonwhite. By age, crypto traders skew young. Pew found that 18- to 29-year-olds are the most likely to have owned crypto (31%). And NORC places the average cryptocurrency trader under age 40.
As for gender, the balance swings the other way. Crypto is even more heavily skewed toward males than stocks.
The socioeconomic status of crypto investors is less clear. NORC found 55% of crypto traders lack a college degree. Pew found no statistical difference between income brackets.
And a Morning Consult poll found that the wealthy are more likely to own crypto. But even the MC survey does show that the gap between the wealthiest and the lowest-income crypto owners (approximately 25 percentage points) is much smaller than the income gap in stock ownership found by Gallup (65 percentage points). In other words, there is much less income disparity in crypto ownership than in stock ownership.
All the above findings come with two important caveats.
First, these surveys indicate which share of a demographic group owns any amount of stocks or crypto, not how much they own. Clearly, this gives a lot of weight to casual investors who own trivial amounts. It's hard to say which side gains or loses from this "retail" skew.
Arguably, a lot more younger Millennials than Xers or Boomers think it's cool to own just a bit of crypto (easily purchasable in fractional amounts through ETFs on, say, Robinhood). On the other hand, just a few dollars in stock ownership (with fractional shares and zero brokerage fees) has also become much easier in recent years.
Second, the best "stock ownership" surveys all include stocks owned indirectly through mutual funds and in DC retirement plans. This democratizes the stock ownership numbers by including tens of millions of indirect passive investors who would never consider themselves "stock traders." (Indeed, many indirect stock owners may not even be aware that they own stocks in this sense.)
Attempts to identify "direct owners" of stocks show this population to be smaller and even more lopsided towards affluent, educated whites. Arguably, crypto trading should be compared against this more exclusive world of direct stock owners. Most DC plans don't allow "alternative investments" like crypto, and the first crypto mutual fund first became available only a few months ago.
So where does this leave us?
Krugman appears to be correct on the basic facts. Stock traders and crypto traders do have very different demographic profiles. Compared to stock traders (or simply stock "owners"--see caveat above), crypto traders are somewhat more male; have less education and lower incomes; and are decidedly less white.
I won't attempt to rule on the justice of Krugman's "new subprime" argument. But I will venture this. If we accept the premise (a) that poorer and less knowledgeable investors should stay away from highly risky assets and (b) that novelty, volatility, and market correlation are adequate measures of risk, then Krugman has a point.
Investors who don't fully understand the risks of crypto and can't afford to be wiped out ought to be especially careful.
Crypto is undeniably novel. It is undeniably high volatility. In CY 2021, BTC's realized volatility (average annualized 30-day) checked in at 87.1. That's a stratospheric number: It's 6 to 7X higher than the equivalent vol for SPY last year (13.1). And it's over 2X higher than the vol for TUR, the Turkey equities ETF.
Over the last couple of years, BTC has also become increasingly correlated with the SPY--and thus is now a very high beta. BTC, I should add, is among the most stable of crypto tickers. As for other risks, such as the perils of dealing with crypto exchanges, these can be left to the reader's imagination.
You may, of course, disagree with the premise. You may believe that these traditional metrics of risk are inadequate.
Or you may believe that "this time it's different" for a variety of reasons. Risk, as always, is in the eye of the beholder. And this may be the most significant bottom line that emerges from these surveys.
The very fact that crypto has become relatively more popular than mainstream equities among younger and less affluent adults may say more about changing subjective perceptions of America's future than they do about the objective merits of blockchain currencies.
Translation: In the eyes of many crypto investors, the odds that the real value of crypto will at least double over the next ten years may be a longshot.
But are the odds any better that the real value to U.S. equities will at least double from today's prices over the same period? Can anyone predict what will happen to equities once the Fed and Congress remove their monetary and fiscal backstops?
Relative risk in this sense is not so easy to assess, especially for lottery-ticket traders who don't really care much about the downside. And it's a question that Krugman does not try to answer.
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ABOUT NEIL HOWE
Neil Howe is a renowned authority on generations and social change in America. An acclaimed bestselling author and speaker, he is the nation's leading thinker on today's generations—who they are, what motivates them, and how they will shape America's future.
A historian, economist, and demographer, Howe is also a recognized authority on global aging, long-term fiscal policy, and migration. He is a senior associate to the Center for Strategic and International Studies (CSIS) in Washington, D.C., where he helps direct the CSIS Global Aging Initiative.
Howe has written over a dozen books on generations, demographic change, and fiscal policy, many of them with William Strauss. Howe and Strauss' first book, Generations is a history of America told as a sequence of generational biographies. Vice President Al Gore called it "the most stimulating book on American history that I have ever read" and sent a copy to every member of Congress. Newt Gingrich called it "an intellectual tour de force." Of their book, The Fourth Turning, The Boston Globe wrote, "If Howe and Strauss are right, they will take their place among the great American prophets."
Howe and Strauss originally coined the term "Millennial Generation" in 1991, and wrote the pioneering book on this generation, Millennials Rising. His work has been featured frequently in the media, including USA Today, CNN, the New York Times, and CBS' 60 Minutes.
Previously, with Peter G. Peterson, Howe co-authored On Borrowed Time, a pioneering call for budgetary reform and The Graying of the Great Powers with Richard Jackson.
Howe received his B.A. at U.C. Berkeley and later earned graduate degrees in economics and history from Yale University.
