A Moment of Reckoning on Financial Literacy

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A Moment of Reckoning on Financial Literacy

Contributors: Charlie Wells
Updated on January 16, 10:38 PM EST

What You Need To Know

We are living in a new era of investing. Meme stocks, cryptocurrencies, NFTs, SPACs and even ETFs have over the past few months attracted tens of millions of new traders, drawn in with a mix of stimulus money, easy brokerage apps and pandemic-era boredom. Those traders are passionate, sometimes very young, often belong to devoted online communities and in some cases have been very financially fortunate.

That doesn’t mean they’re financially literate. Experts have warned since the beginning of the latest retail mania that many new entrants are conflating investing with speculating.

The difference can at times feel hazy, particularly at a moment when perspectives are shifting. Take Bitcoin. Just a few years ago, the head of the largest bank in the U.S. called it a “fraud,” reflecting the views of many on Wall Street. But these days it’s increasingly looking like a mainstream investment. ETFs linked to Bitcoin debuted recently and the token has become so large that Wall Street just can’t ignore it. (Jamie Dimon now says he regrets his “fraud” comment.) Still, this doesn’t mean Bitcoin is risk-free, or that the tens of thousands of other coins in the cryptocurrency universe are suitable assets for retail traders.

To make sense of all this, investors have been turning to some unexpected sources. TikTok is one. There, and in other corners of social media, “finfluencers” can make hundreds of thousands of dollars peddling financial knowledge to young audiences hungry to learn more. Much of this is educational and even entertaining. Yet the social world is rife with financial scams, and they are becoming more sophisticated than ever.

If you are a retail investor — or are thinking of getting into the market soon — having strong financial literacy is crucial. But what that entails is changing rapidly. In a fast-developing developing market, you might now want to know more than simply what Bitcoin is. These days you might instead be left wondering about the difference between buying Bitcoin, a Bitcoin ETF and another coin, such as Solana. You can stay up-to-date with answers to questions like this and the latest on this subject by subscribing to follow this story.

Key Coverage

By The Numbers

  • $681 million Value of major crypto thefts, hacks and frauds in first half of 2021
  • 33% Percentage of Gen-Z poll respondents who said their financial knowledge is low
  • 7 Number of U.S. states that required or planned to require standalone financial literacy high-school courses as of June

Why It Matters

Bringing new participants into the market is a good thing. Recent evidence shows that cryptocurrency may be attracting a more diverse group of investors who are using the asset not just as a way to save money, but to build wealth.

In order to maintain that progress, it will be important for investors to know how to navigate risks in a changing environment. Despite mega returns in early 2021, a basket of the 50 stocks most popular with retail traders fell 7.8% in early December. They trailed another filled with companies most favored by mutual funds by 5.8 percentage points. That’s the most ever, according to Goldman Sachs data.

Meanwhile, some money managers fear the end of crypto’s protracted bull run. Digital assets are the “top contender” for a “major correction” in 2022, according to a survey done for Natixis Investment Managers. That is concerning given that 55% of people in a recent survey by crypto-firm Grayscale Investments said they started investing in Bitcoin in 2021. Will new investors be ready to stomach a bear market?

Regulators in Washington are concerned. A number have said they see issues echoing the run-up to the 2008 financial crisis. (Others, however, say they are keen to avoid knee-jerk reactions that could hamper the development of cryptocurrency.)

Improving investors’ financial literacy may help. As of this summer, only seven states required — or were in the process of mandating — a standalone high-school course on the topic, according to the advocacy group Next Gen Personal Finance. Some question the value and content of financial literacy education, while others such as Mark Cuban, billionaire owner of the Dallas Mavericks basketball team, has gone so far as to say that he thinks buying Dogecoin for his son is “educational.” With so much new money coming into new assets and so much uncertainty ahead, it’s clear investors will learn about the market. It might just happen the hard way.

To avoid that, be sure to check out Bloomberg’s wealth of coverage on financial literacy topics. They range from finding a financial adviser you can trust to figuring out what it takes to feel truly wealthy. Our expert contributors also have suggestions in dealing with student debt, talking to friends about money troubles, and the financial pros and cons of marriage.

— With assistance by Suzanne Woolley

    Also children’s savings accounts, Doing Business rankings, Rule 15c2-11 and Deutsche Bank chutzpah.

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