According to a recent study published by the Financial Industry Regulatory Authority Investor Education Foundation and NORC at the University of Chicago, 31% of new cryptocurrency investors in 2022 used a friend’s suggestion as their primary reason for buying in. This is a much higher percentage than new investors in more traditional assets like stocks and bonds, where only 8% cited friends as their motivation.
While a friend’s recommendation may seem like a trustworthy source of information, it can be a “double-edged sword,” according to Gary Mottola, research director at the FINRA Investor Education Foundation and a co-author of the report. On the one hand, crypto can be an on-ramp to more traditional investing, which is generally a good outcome. On the other hand, the friends recommending crypto, or sources of information on social media, may not be reliable.
This is a valid concern, as the fear of missing out can be a powerful driver of investment decisions. Bitcoin and other cryptocurrencies rallied through 2021, a record year for the digital assets. However, the tide turned quickly during a so-called “crypto winter,” when investors lost more than $2 trillion in the year following the market peak.
Investors may not understand the risks and volatility associated with crypto or other investments, or how it fits within a broader, well-diversified investment portfolio. They may be getting a friend’s recommendation when the market is nearing its top, when much of the growth potential has already been realized.
However, this is not to say that a friend’s recommendation is necessarily a poor reason to buy into the digital assets. If investors are doing their own investigation into the market and how it works, then it can be a great way to get started in investing in cryptocurrencies. It is important for investors to do their own due diligence and not blindly rely on the recommendations of others.
One of the dangers of following a friend’s advice is that investors may not fully understand the risks and volatility of cryptocurrency. Cryptocurrency is a highly volatile market, and investors need to understand the risks involved before investing their money. Additionally, investors need to understand how cryptocurrency fits into a well-diversified investment portfolio. A diversified portfolio is essential to managing risk and achieving long-term investment goals.
Another potential trap of following a friend’s recommendation is that investors may be getting the recommendation when the market is nearing its top. This means that much of the growth potential has already been realized, and there may be limited upside potential for the investor.
In conclusion, while a friend’s recommendation can be a good way to get started in investing in cryptocurrencies, it is important for investors to do their own due diligence and not blindly rely on the recommendations of others. Investors need to understand the risks and volatility of the market, how cryptocurrency fits into a well-diversified investment portfolio, and do their own research before investing their money. A diversified portfolio is essential to managing risk and achieving long-term investment goals.
Disclaimer: This article is for educational purposes only and is not financial or professional advice. Any investment decisions are solely your responsibility. Conduct your own research and seek professional advice before making any financial decisions. We do not endorse any product, service or company mentioned, and use of information is at your own risk.