Why retail investors put money in Bitcoins despite many suffering losses

Market


As cryptocurrencies continue to suffer from the fallout of the FTX crisis, a study from Bank for International Settlements examined what drives retail adoption of Bitcoin despite volatility in cryptos. In the study, Switzerland-based BIS examined the drivers of crypto trading app adoption on the daily use of crypto exchange apps for 95 countries over 2015–22.

The study found that rising Bitcoin prices are what drive crypto adoption. “A rising Bitcoin price is followed by the entry of new users. About 40% of these new users are men under 35, commonly identified as the most “risk-seeking” segment of the population.”

The study also found that about three-quarters of retail investors have lost money on their Bitcoin investment.

“Cryptocurrencies are volatile assets that have gone through multiple boom-bust cycles. To date, people do not use cryptocurrencies widely to make payments, to measure value or to finance real-world investments. Yet despite this, retail investors continue entering into crypto exchanges to trade cryptocurrencies like Bitcoin,” the authors said.

Bitcoin prices have tumbled since reaching a high of almost $69,000 in November last year, stoked by ultra-low interest rates and stimulus cheques. Since then the world’s largest token has since plunged 75%, weighed down by monetary policy by central banks across the world and blowups at crypto outfits, most recently Sam Bankman-Fried’s FTX exchange.

“We show that, when the price of Bitcoin rises, more people download and actively use crypto exchange apps. These new users are disproportionately younger and male, commonly identified as the most “risk-seeking” segment of the population. We show that, due to price declines, an estimated 73-81% of retail investors have likely lost money on their initial investment,” the authors of the study said.

The study focussed on two events that “affected Bitcoin’s price without directly impacting crypto exchange app usage: the crackdown of Chinese authorities on crypto mining in mid-2021 and the social unrest in Kazakhstan, a country where many Bitcoin miners are located, in early 2022.”

It found out that “during both events a change in the price triggers a significant change in the number of users. Overall, our results suggest that rising Bitcoin prices are what drive crypto adoption (consistent with theories of feedback trading), rather than alternative explanations.”

“During both episodes price changes have a significant effect on the entry of new users. Overall, back of the envelope calculations suggest that around three-quarters of users have lost money on their Bitcoin investments.”

The study also found that during the time period of analysis (2015-22), crypto exchange app adoption, measured with the number of total downloads per 100,000 people, is highest in Turkey, Singapore, the United States and the United Kingdom. It is lowest in China and in India, where legal restrictions likely prevent greater retail adoption, the study said.

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