Financially Inclined November 24, 2023 Transcript

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Yanely Espinal: What’s up, everybody? I’m Yanely Espinal and welcome to Financially Inclined From Marketplace. We’re sharing money lessons for living life your own way. Now I’m really excited for this episode because this topic has been highly requested by so many of you. Drum roll, please! Cryptocurrency. I’m talking about Bitcoin, Litecoin, Dogecoin. You’ve probably heard of these by now. Now I know that crypto can seem complicated to understand, and plus there is so much hype about it online. But investing in crypto also comes with a lot of risk. So to help us unpack what cryptocurrency is and the pros and cons of buying some, we’re joined by Caitlin Ostroff, a journalist for The Wall Street Journal, covering all things crypto. But this is also a very special episode because I have a co-host. His name is Giovanni Moreno, and he’s a college student who actually invested some money in Bitcoin before he felt like he really understood any of it. So you already know he has a lot of really great questions to ask Caitlin. So let’s get into it.

Giovanni Moreno: Right off the bat, I invested in crypto back in 2020 during the pandemic. I had just turned 18 at the time, and everybody was talking about crypto, especially Bitcoin. So I put in about $1,500, not knowing much about it. And I was curious what is crypto? What is Bitcoin?

Caitlin Ostroff: Crypto is digital money that is not issued by any government and is not controlled by any government, that is driven largely in part by what people hope the value will be in the future. Cryptocurrencies are basically just these lines of computer code that someone wrote, and they branded it as, “Here’s this thing you can invest in.” Bitcoin is the oldest cryptocurrency, that was the original one, and that was created by this anonymous person who went online as Satoshi Nakamoto. You know, people picked up on his idea and his code, and now there’s a bunch of people who wind up buying and selling Bitcoin every day. And from that sprung a bunch of other cryptocurrencies. And those might also be ones you’ve heard of: Ether, Dogecoin, Shiba Inu coin, the ones that have kind of taken on almost this meme status.

Gio: Leading up to being 18, I was anticipating getting into the stock market. I always wanted to get into stocks. And during the time I had briefly heard about bitcoin and crypto, but I didn’t really know what it was. I just seen like big famous people were talking about it. And so I’m like, why not? But in reality, I didn’t know what it was, what it was, or where it was going. I really don’t understand what’s the difference between Dogecoin and Bitcoin? Why are there so many?

Caitlin: Honestly, it’s because it’s really easy just to make copycats of these different coins. Dogecoin itself was a copycat of another cryptocurrency, which was a copycat of another cryptocurrency. At the origin the code was copied verbatim and pasted and just rebranded, and then they added a logo on it. And so there are a lot of them because kind of anyone can make it. Like you don’t have to be technology, technologically sophisticated to create a cryptocurrency. And so you have tens of thousands of these on the market, but it’s one of those things where because there are so many and it’s not a very regulated market: you don’t have the Securities and Exchange Commission deciding which coins should be offered to the public in the way that you would have with stocks. If you want to buy a share of Apple, you know, Apple has to file all these disclosures. They have to clear information with federal regulators. They have to, you know, make a lot of information transparent. With crypto, you don’t have that same regulation designed to protect the average person because, as you said, like, you know, you see all these celebrities promoting these things. You are up against people who might have a lot more information than you do about whether someone else who’s famous and holds a lot of these plans to sell or buy. And so there’s not the same protections afforded.

Gio: As far as the different cryptos, is one safer than the other?

Caitlin: There’s not necessarily a clear case that any of them is the safest, but if you’re trying to compare which one is safer comparatively, it’s a good idea to look at the history. So how old is the coin? If it’s older and it’s been tried and tested, it’s a little bit less risky than it is to buy something that’s brand new. There’s data providers online that break down who holds the most of a token. And so if you do a little bit of research, and there’s one person who holds 10% of all Bitcoin, and it’s not clear who that person is, that may not be a great idea, because you run the risk that someone decides to sell it all en masse. And so you can do kind of these basic checks and balances like that to see if you’re at kind of any personal risk of one person shifting that scale and then look to see whether anyone has a lot of control over it. So even if they don’t hold a lot of it – again, Elon Musk, an example is Dogecoin – can the tweets from one person, and is that person likely to tweet, shift the value? And if that’s the case, you have to know that that’s going to be a much riskier investment. Then you know something where a lot of different people tweet about it constantly, but no one’s really independently moving the needle that much.

Gio: Yeah, I was actually scared when I saw how Bitcoin was once $68,000 and recently it dropped to, I want to say, $15,000. So personally, I was I was scared. I was like, “Should I sell? Should I not sell?” So why is it so volatile?

Caitlin: It’s all driven by sentiment. Are people happy about crypto right now? Are they scared about crypto? And it’s not quite clear always with any of these cryptocurrencies who is doing the buying and selling. But typically when something good happens, when you have all the Super Bowl ads from 2022 that had a lot of crypto company commercials within that mix, all of a sudden crypto is riding high, and everyone wants to buy a piece of that. You have small investors, you have these big money managers that wind up stepping in and it goes up. And then as soon as that breaks, we often see the price crash. Sometimes these are small crashes. Sometimes it’s down 2% over a day. Sometimes these are big crashes: I’ve woken up on a Saturday morning and it’s down 20%. Frankly, I’ve seen it move that quickly based off of a tweet that wound up not being true. It’s not a very large market. It is fueled purely by sentiment and the hope that more people in the future will want to hold a currency that isn’t issued by a government, or that is easily traded in different parts of the world. People have all sorts of reasons for wanting to hold Bitcoin, but you just have to know that that’s going to ebb and flow based off of what’s happening in the news, what’s happening on social media, what’s happening with institutional adoption. You know, if you’re nervous of that kind of volatility or you don’t think you can stomach it or you can’t lose the full amount that you put in, you put yourself in a really bad position.

Yanely: Right. So what would you say Caitlin is like the most, you know, what some of the most misconceptions are that are common with crypto?

Caitlin: That you’re all going to be rich. You absolutely will not all be. A lot of a lot of companies and a lot of projects advertise, you know, “get in now, buy this coin, it’s going to be huge.” And it may be like legitimately, if you get an early, you legitimately may make money, but it’s also reliant on the ability to then sell it to someone else one day. And you can see this in FTX’s token, is a good example: that was cryptocurrency exchange that collapsed amidst that allegation. And for that one, a lot of people held this coin, tens of millions of dollars worth of FTT, and on paper they were rich, but when it came time to sell that for actual dollars, which is what people actually pay their bills with, all of a sudden the exchange had collapsed, and no one can sell it for more than a dollar a token. And so that’s the thing with crypto is you can make a lot of money on paper, but you need to be careful to make sure that if you don’t plan to always keep it in crypto, if you think you ever might want to sell and move it into, you know, dollars, euros, whatever currency, someone has to be willing to buy that for the price that you want to sell it at.

Gio: What would be the best way for someone to jump on if they’re crypto curious? Some people like my friends.

Caitlin: Honestly, if they’re curious, they should just start reading everything they can. At this point, Investopedia has good basic information on: what is crypto, what is Bitcoin, what is Ethereum? What are all of these different coins? You know, even if you go on websites like Coindesk, you can find basic information. A lot of exchanges even, like Coinbase, have these digests on, you know: this is Bitcoin, what is its history like? What should people know about the project? And those are really good places to start just to kind of find out some information. Don’t get information just from one source. Don’t just get it from crypto companies. Don’t just get it from the traditional media. People should be going to a mix of sources. There’s no right answer as to like, what is the one thing to buy in the same way that if you go to an investment advisor, half of them are going to tell you, “Buy tech stocks,” and the other half are going to tell you like, “Buy the, like you know, tiny healthcare companies, like those are the future.” Everyone’s going to have a different opinion. And that’s what creates that’s what creates a market. That’s why things have valuations and they go up and down, and that’s what makes it, you know, potentially profitable or potentially loss making to buy any one of these assets because everything to some degree trades off of what people think it will be worth.

Yanely: That’s a good point. I’ll jump in here because I feel like, Caitlin, one of the things, like I work with a lot of teenagers and college students and high school students, and I get that same question that Gio had about, you know, “Where do you go to learn like, what are the first steps?” And I always say the same thing you say, Caitlin, I’m like: “Start reading, reading everything you can and researching.” And then I one time had pushback from a student. I wonder what you think about this, because they said to me, “I have! I pull up Investopedia, I pull up NerdWallet, I pull up all these websites, and I start reading, and what I read is: ‘it is distributed, decentralized, digital…’” And they’re like, “What and what and what?” And so the more you read, you’re kind of like, “Wait, these words don’t make sense!” So it makes you kind of sometimes feel more confused than when you started reading. What would you say to that?

Caitlin: They have a valid point. Traditional finance crypto, there’s a lot of jargon, there’s a lot of terminology: “100 x leverage,” “We rely on arbitrage with market makers.” Like what does any of that mean? If you’re confused, don’t buy it. It’s really hard to cut through a lot of the jargon. And it’s one of those things where unless you can understand it, unless you actually know what you’re buying and investing in, don’t touch it. And it’s really hard to clear that up in plain language, in part because some of these things are very technical and complicated, and people aren’t that great at breaking them down. But also just because there are a subset of people who will use jargon as a way to make it seem like, “Oh, you know, “Caitlin’s the stupid one, she’s clearly missing how great this product is.” And if that’s the case, that’s not something you want to buy because you just don’t understand how it works. That’s why, you know, sometimes news stories are a little bit of an easier entry point. And you can even find, you know, just basic evergreen articles on like, “what is Bitcoin?” “What is Dogecoin?” And like, and, and honestly, like something like Dogecoin is probably an easier entry point for people, not to buy, but just to begin learning about what cryptocurrency is because it winds up being a little bit more relatable. You know the memes. You know Elon. You know, the Shiba Inu Kabosu, who it’s based off of. Like these are all things you can relate to. And then it’s easier to dive into some of the harder stuff. And if you’re curious, there’s nothing wrong with putting like a dollar or $5 in something. You don’t have to buy like one whole Bitcoin. So if you look at the price of Bitcoin, it says “this is worth $30,000.” But you can buy like a fraction of a Bitcoin. You don’t need to spend all of that money. So if you want to put like $5 in a project just to see, like, what happens, that’s totally fine. But like, you know, you’re putting in a little bit of money just to find out, like, how it works, what happens? And if you lose that $5, that’s fine. You go without Starbucks for a day. It was only so much that you could afford to lose.

Yanely: What would you say is your top list of, like, red flags to look out for when you are considering buying crypto?

Caitlin: Number one: who made it? Is it a real name? Is it a real person with a LinkedIn and a Twitter and a Facebook and a biography on some official sounding website that sounds like they gave a lecture or something? So one, is there a real person behind it? Two: did they spin this up a week ago or a day ago? Was it, is it a very recent project? That can be a red flag, especially if you don’t know who is behind it because that can be playing off of hype and just hoping to get people’s money and while they think they can. Three: is it pegged to a hype? Is it pegged to a show or a meme or, you know, something else that suddenly everyone on your Twitter is really excited about and they may not ask questions because of that? Four: is it very, very cheap? Can you buy a million of these coins at .000002 cents a piece? That is a red flag because it appeals to people who might be inclined to participate in a get rich quick thing. They see it and they go, “Oh, for just a dollar I could buy so many of these and I’ll be rich.” You may not be. And then five: is there a clear vision of what the project is? A lot of coins will talk about, “We want to do payments for this specific type of transaction.” There needs to be some theory as to why someone believes their coin is better than all of the others or will have a place within the crypto ecosystem, because this winds up getting into the idea of will you eventually be able to sell it to someone if you need to? If it’s a project that’s tied around, you know, here’s the one thing in the moment everyone’s excited about, you have to take a step back and say: in one year, do I think the next person is going to want to buy this? Or at least to buy this at, you know, $50 apiece? And if the answer is no, you need to be really careful.

Gio: Thank you, Caitlin.

Caitlin: Thank you guys so much.

Yanely: Okay. I know that was a lot of information, but I learned a lot of things and I hope you did, too. I especially loved how Caitlin had that list of red flags at the end because it just feels like all we see online is hype about crypto. People think it’s a quick and easy way to get rich, but now we know not to let that hype fool us. Any time you want to invest in something, you got to do your research. 

So this week, my challenge for you is to reflect and write down your answers to these questions. First, what is your understanding of crypto right now? How would you explain it to a younger sibling? How’s the rest of your money life doing? You know, your savings goals and money that you owe, big events or purchases coming up like a birthday, graduation, or your prom. And how do you feel about taking on financial risks? Most importantly, can you afford to lose the money you’re considering investing? Because that’s the biggest risk. If there’s any other questions that pop up while you’re doing this, add them to the reflection. The whole point is to set aside time to reflect and to do your research. A lot of people make the mistake of skipping this, and they just jump right in instead. But not you though. You know better thanks to this week’s guests, Gio and Caitlin. 

CREDITS:

Yanely Espinal: “Financially Inclined” is brought to you by Marketplace from American Public Media, in collaboration with Next Gen Personal Finance. I’m your host Yanely Espinal. Our senior producers are Hayley Hershman and Zoë Saunders. Our video editor is Francesca Manto, and our graphics artist is Mallory Brangan. Our producers are Hannah Harris Green and Hayley Hershman. Gary O’Keefe is our sound engineer. Our intern is H Conley. Bridget Bodnar is the Director of Podcasts. Francesca Levy is the Executive Director. Neil Scarbrough is the VP and General Manager of Marketplace. Our theme music is by Wonderly.

Hannah Harris Green: Financially Inclined is funded in part by the Sy Syms Foundation, partnering with organizations and people working for a better and more just future since 1985. And special thanks to the Ranzetta Family Charitable Fund and Next Gen Personal Finance for continuing to support Marketplace in its work to make younger audiences smarter about the economy.