Cryptocurrencies such as Bitcoin are a highly volatile asset class, with potentially very high returns matched by equally large losses. Although there is a lot of academic research on financial characteristics of cryptos, research on investors is rather rare.
The study, "Individual cryptocurrency investors: Evidence from a population survey," recently published in the academic journal International Journal of Innovation and Technology Management, examines the financial success of cryptocurrency investments achieved by individual investors. In addition, the study analyzes whether this depends on similar factors as is the case with investments in other asset classes, such as shares.
Crypto investors in Germany mainly male
The analysis is based on a Germany-wide representative online survey dataset of 3,864 citizens aged 18 and above. Of these, 354 people, or 9.2% of respondents, confirmed owning cryptocurrencies. 225 people of the latter group, representing 5.8% of the total number of respondents, could be classified as investors according to the underlying characteristics. They fulfilled the requirement of having acquired the respective cryptocurrency directly and not having received it via mining or, for example, as a gift.
The analysis of the data revealed that crypto investors are more often than average male (77.3% compared to the average of 50.8%) and more than nine years younger than people who have not invested in cryptocurrencies. In addition, crypto investors above average often have a high level of education in the form of a university degree or a doctorate.
Positive returns achieved through crypto?
56% of crypto investors surveyed reported a positive return on their investment. In contrast, 29% of respondents said they had recorded negative results. The rest of the respondents reported breaking even. On average, the return on investment for all 225 individuals was exactly 300%.
As part of the study, the fundamental research question was examined to what extent, if any, these returns can be attributed to the fact that individuals may have been particularly "smart" investors or whether the reason for the positive returns may be "just" that the overall cryptocurrency market has grown so strongly as a whole. It would be a smart investment strategy if the investor's returns were higher than the fundamental price increase of the market within a certain period of time. If the price of Bitcoin were to rise by 60% within a year, for example, but a crypto investor "only" achieved a return of 50% in the same period, this aspect suggests that this was less a smart investment strategy than luck or timing.
Crypto market growth surpasses investor investment
The study identified that less than half of crypto investors (44%) were able to achieve higher returns than Bitcoin. Here, Bitcoin represented the study's underlying metric for market returns. As a result, these findings suggested that, on average, private crypto investors are not able to outperform the overall market. In this aspect, cryptocurrencies resemble traditional investment markets.
When considering cryptocurrency investments individually, it should be kept in mind that the hypothetical buy-and-hold returns of an early investment in Bitcoin are so high that it is very difficult for private investors to beat this "market" index. This is particularly indicated by the available results of private investors who entered the crypto market very early between the years 2009-2012. They achieved returns ranging from 51% to 195%, a return that is comparatively well below that of a notional buy-and-hold strategy. By nature, it can be assumed that the private investors sold their cryptocurrencies (in parts) over the years and possibly reacquired them at later points in time. A procedure that consequently has a corresponding impact on the total return of the respective investor.
Beyond the analyses described above, explanatory factors for investment results were examined. These were, for example, socio-economic characteristics, the own self-assessment of knowledge or confidence in cryptocurrencies, as well as the portfolio size. Within this, it was identified that higher income has a significant positive effect on returns of crypto investors. This result is consistent with the literature on individual investment in stocks, where lower income is associated with lower returns.
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Conclusions from the study
This study adds to the existing literature on cryptocurrencies by specifically analyzing individual investors. In order to compare with other asset classes, the study built on literature from individual investors in equities and other asset classes. During the evaluation, it was found that cryptocurrencies are subject to similar fundamental relationships and phenomena as traditional investment products. Specifically, the comparatively high retail investor returns of 300% in cryptocurrencies are likely due to fundamental market growth rather than individual investment behavior.
It is likely that the cryptocurrency market will continue to mature and converge with traditional financial markets as its social relevance increases. Improved and tailored regulation as well as the reduction of information asymmetries represent only two of the potential starting points.
First tendencies of convergence between traditional stock markets and cryptocurrency markets can already be observed today. Following these explanations, it is quite conceivable in the future that the cryptocurrency market will become an increasingly important and essential part of the financial markets. What is for sure is that how regulators deal with the regulation of the cryptocurrency market will not only have an impact on the behavior of private investors, but will most likely also have an impact on shaping the future of finance.