One of the first rules taught to students in economics classes everywhere is represented in the old saying – “There is no such thing as a free lunch!”

Probably one of the most dramatic business market stories reflecting this saying in in recent weeks is the remarkable meltdown in the price of “bitcoin”, which represents the most popular form of digital money -- fueling the explosive growth of the cryptocurrency market.

The financial press has widely publicized the bankruptcy of cryptocurrency trading firms – such as near-total collapse of FTX, a Bahamas-based cryptocurrency exchange whose founder, Sam Bankman-Fried, was previously worth $26 billion, but recently claimed to have a total of less than $100,000 in the bank.

Another crypto-related company, BlockFi, which has been extending consumer loans backed by the value of crypto currency, recently filed for bankruptcy protection as a result of the collapse in the value of crypto.

Cryptocurrency is a form of money, which exists solely electronically, and is not backed by any government. Unlike paper currency, the value of electronic “coins” is determined by the demand of the market of people who use them. Needless to say the value of the crypto can shift almost instantaneously.

Bitcoin, which is the oldest form of cryptocurrency, is a relatively new phenomenon – created in 2009 by Satoshi Nakamoto, an anonymous (Wikipedia uses the term “pseudonymous”) or fictitious man living in Japan.

Although there has been a lot of speculation about Nakamoto’s true identity, some point to either an individual or group of software or cryptography experts based in the U.S. or Europe.

The fact that the root of the word “crypto” means “secret” or “hidden” and is used to define a currency that is valued solely by a market of individuals who trade it, and was invented by an anonymous individual – was not enough to keep it from becoming a global system of trade, worth billions of U.S. dollars, and impacting the reality of millions of investors.  

All of these factors are what likely made many conventional financial advisors not pay bitcoin much attention as the market continued to grow.

I mean, can somebody really get away with producing any intangible item – not just units of currency – and convincing millions of people that it had actual value, even though it wasn’t backed by government fiat?

Evidently, the answer is, and has been, an emphatic “Yes!”

Along with the growth of the market, there has been significant marketing of crypto in the African American community. Crypto has been seen as a way for black investors to get involved as real players in a market that is rapidly developing.

Cryptocurrencies – of which bitcoin is one of thousands of different kinds – can be used as payment for a wide range of tangible items in thousands of retail locations, not to mention a myriad of online sites.

In the nearly decade and a half that the commercial world has been using crypto, the unit value of bitcoin has fluctuated wildly.  In the 13 years since it was introduced, the currency’s unit value has risen from virtually worthless to an estimated all-time high of $69,974.77 in October 2021, before losing approximately 77% of its price to $16,154.07 as of November 29, 2022.

This roller-coaster volatility mainly reflects the fact that crypto’s value is not based on conventional means of support – i.e., a government Central bank officially setting an exchange rate of value –or even a target supply -- for the currency or even an established exchange of trading for investors.

Despite the recent sharp drop in the price of crypto, the fact that single units continue to generate some market value, could bode the prospect of longer-term sustainability as a currency of exchange.

Because of the volatility, investors – especially those who are new to the market – should limit their investment in crypto. Conventional wisdom calls for investors to limit investments to below 5% of their total investment portfolio.

While it is possible that crypto could be used as a tool for economic development in the African American community, individual investors should proceed with caution. The market wisdom and research needed to navigate and harness the profit potential of crypto demonstrates another old saying: “Anything that seems to be good to be true usually is!”

• • •• • •