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Study shows FOMO drives crypto krill to Bitcoin whales with up to 81% seeing losses

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(Kitco News) - The crypto community is overrun with experts and ideologues singing the praises of cryptocurrency as a smart way to hedge against inflation, or a principled way to opt out of corrupt financial systems, or a prudent way to protect against global crises.

A recent study by the Bank of International Settlements (BIS) shows that these arguments are like the buffet at a casino: a nice bonus if it’s there, and a convenient way of justifying the whole exercise, but not what’s bringing people through the door.

In a working paper entitled ‘Crypto trading and Bitcoin prices: evidence from a new database of retail adoption,’ authors Sebastian Doerr, Jon Frost, Raphael Auer, Giulio Cornelli, and Leonardo Gambacorta, built a large dataset of retail investors’ daily use of crypto exchange apps across 95 countries from 2015 to 2022.

The authors show that there’s one overwhelming factor that drives people to download crypto apps and to purchase Bitcoin: price increases.

“First, we show that a rise in the price of Bitcoin is associated with a significant increase in new users, ie entry of new investors,” they write, adding that the positive correlation between newsworthy price increases is strong even when they controlled for other factors such as “overall financial market conditions, uncertainty or country characteristics.”

Perhaps most telling, they write that “the price of Bitcoin remains the most important factor when we control for global uncertainty or volatility, contradicting explanations based on Bitcoin as a safe haven.” Even when differences in quality and trust in institutions or levels of economic development are accounted for, a simple price increase “still has an economically and statistically significant effect on the number of new users and explains the lion’s share of the variation in the entry of new users.”

The study also makes it very clear that the ‘crypto-bro’ stereotype is well-earned. “The largest group of users by far – nearly 40% – were men under the age of 35,” they write. “Men between 35 and 54 made up a further 25% on average.” This means over 65% of the people on platforms like Binance, Coinbase, and (shudder) FTX are male, and they skew young.

What makes this demographic special in the world of finance? Is it their prudent spending decisions? Their passion for cautious planning? Maybe it’s their deep understanding of macroeconomic and historical factors that impact financial markets? A proclivity for due diligence, perhaps?

If you said risk appetite, you’re right. Men under 35 are “the most ‘risk-seeking’ segment of the population” and are “more sensitive to changes in the price of Bitcoin than female users and older men.”

Crypto platform adoption and Bitcoin investing is a young man’s game. “Less than 35% of all users globally are female, and the majority of female crypto app users are under 35,” they write.

When the authors correlated the timing of downloads and purchases with the demographic that was downloading and purchasing, the conclusion was clear: “Taken together, these patterns are consistent with the speculative motive being caused by feedback trading considerations, ie users being drawn to Bitcoin by rising prices – rather than a dislike for traditional banks, the search for a store of value or distrust in public institutions.”

But hey, this demo may reply, so what? So us young men get into crypto when crypto is doing well… why does it matter? Well, as most older men (and nearly all women) will be happy to tell them, jumping on bandwagons and buying high is lousy investing. The young bucks are being led like lambs to the slaughter. Or like krill to the whales.

The authors write that their findings “support the notion that, by and large, investors view cryptocurrencies as a speculative investment (a ‘gamble’) rather than a means of payment for real economic transactions.” They also ask a question which, in a post-Luna, post-Venture, post-FTX world, has answered itself: “if users are driven primarily by backward-looking price movements, are they fully prepared for the potential consequences of a price correction?”

“Our estimations that 73-81% of global investors have likely lost money on their crypto investment, and that larger investors (“humpbacks”) have tended to sell when smaller investors are buying, may give grounds for deeper investigation of claims that crypto will ‘democratise’ the financial system,” they conclude.

Well, if nearly everyone who voted with their wallets is sharing in massive losses on their crypto ‘investments’, that’s democracy of a kind, isn’t it?

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.