One of the oldest rules in investing is also one of the simplest: don’t invest in things you don’t understand.
Crypto should be no exception.
In a recent Globe and Mail column, I looked at new research that attempts to measure how much people actually understand about crypto. More than 500 Americans completed a newly developed Crypto Literacy Scale and the average score was just 41 per cent. Nearly 15 per cent of respondents failed to identify a single correct answer.
That knowledge gap matters because buying crypto has never been easier.
The concern is not whether Bitcoin, Ethereum or any other digital asset will ultimately prove to be a good investment. It is that access to an increasingly complex financial world has expanded much faster than people’s understanding of it.
And where there is a large gap between access and knowledge, bad decisions and bad actors tend to flourish.
Crypto is particularly unforgiving. Send an asset to the wrong address and the transaction may be irreversible. Lose control of a private key and the consequences can be catastrophic. Add fake wallet support, social-media impersonators and investment scams into the mix, and even people who have no intention of owning crypto can find themselves exposed to crypto-related risks.
This is why crypto literacy may eventually need to be treated more like general financial literacy.
Understanding how crypto works does not mean you should invest in it. It simply means you are better equipped to recognize the risks, ask better questions and make a more informed decision.
And if someone does choose to invest, the old disciplines still apply: diversification, sensible position sizing, skepticism toward hot tips and humility about what you know.
Crypto may be new technology, but it has not repealed the basic rules of investing.
If you don’t understand it, don’t invest in it. Crypto just raises the cost of ignoring that advice.
Preet Banerjee
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