Cryptocurrencies like Bitcoin are a volatile asset class, with potentially high returns offset by equally large losses. While there is a large amount of academic research on the financial characteristics of cryptocurrencies, research on investors is scarce.
A study titled “Individual Cryptocurrency Investors: Evidence from a Demographic Survey” was recently published in the academic journal “International Journal of Innovation and Technology Management.” to examine The financial success of cryptocurrency investments achieved by private investors. In addition, the study analyzes whether this is based on similar factors as with investments in other asset classes, such as stocks.
Cryptocurrency investors in Germany are mostly male
The analysis is based on a representative Germany-wide online survey dataset of 3,864 citizens aged 18 and over. Of these, 354 people, thus 9.2% of those surveyed, confirmed that they own cryptocurrency. 225 people from the latter group and thus 5.8% of the total number of respondents can be classified as investors according to basic characteristics. They met the criterion of obtaining the cryptocurrency in question directly and not receiving it by mining or, for example, as a gift.
Data analysis showed that cryptocurrency investors are disproportionately male (77.3% compared to a median of 50.8%) and more than nine years old than people who have not invested in cryptocurrency. Additionally, cryptocurrency investors are more than average likely to have a higher level of education in the form of an associate degree or Ph.D.
Making positive returns from cryptocurrency?
56% of cryptocurrency investors surveyed stated that they had a positive return on their investment. On the other hand, 29% of the respondents reported negative results. The rest of the respondents said that they achieved a balanced result. On average, the return on all 225 subjects was exactly 300%.
The study examined the primary research question of whether these returns could be attributed to the fact that individuals may have been particularly “smart” investors or whether the positive returns were “only” caused by the overall cryptocurrency market growing a lot in general. It will be a wise investment strategy if the investor’s return is higher than the market’s underlying price increase over a given time period. For example, if the price of bitcoin rose 60% in a year, but a crypto investor “only” made a 50% return in the same period, this aspect suggests that this is a less smart thing to do with an investment strategy because luck or timing acted.
The growth of the cryptocurrency market outweighs the investment of investors
The study determined that, at 44%, less than half of cryptocurrency investors were able to generate higher returns than were the case for Bitcoin. Bitcoin represents the measure of market return upon which the study was based, and as a result, these findings lead to the conclusion that private crypto investors are, on average, unable to outperform the market as a whole. In this aspect, cryptocurrencies are similar to traditional investment markets.
When looking at cryptocurrency investments individually, it should be borne in mind that the hypothetical buy-and-hold returns on an early investment in Bitcoin are so high that it is difficult for retail investors to beat this “market” indicator. This is particularly indicated by the results available to private investors who entered the crypto market very early between 2009-2012. They have yielded returns of between 51% and 195%, which is far less than that of a bogus buy-and-hold strategy. Naturally, it can be assumed that private investors have (partially) sold their cryptocurrencies over the years and may have bought them back at a later date. An approach that thus has a similar effect on the total return of the respective investor.
In addition to the analyzes described above, explanatory factors for investment outcomes were examined. These included, for example, socio-economic characteristics, an individual’s self-assessment of knowledge or confidence in cryptocurrencies, and portfolio size. As part of this, it has been determined, among other things, that higher income has a significant positive impact on the returns of cryptocurrency investors. This finding is consistent with the literature on individual equity investing, where lower income is associated with lower returns.
Conclusions from the study
The study complements the existing literature on cryptocurrencies with the specific analysis of private investors. In order to be able to make a comparison with other asset classes, the study drew on literature from the area of individual investors in stocks and other asset classes. As part of the evaluation, it was found that cryptocurrencies are subject to similar underlying relationships and phenomena as traditional investment products. In particular, the relatively high returns of 300% for private investors in cryptocurrency are more likely to result from the growth of the underlying market than individual investment behaviour.
It can be assumed that the cryptocurrency market will continue to mature with its increasing social importance and will move closer to the traditional financial markets. Improved, tailored organization and reduction of information asymmetries are just two possible starting points.
The first trends towards convergence between the traditional stock markets and the cryptocurrency markets can already be seen today. Following these explanations, it is quite conceivable that the digital currency market will become an increasingly important and essential part of the financial markets in the future. What is certain is that the way regulators approach regulating the cryptocurrency market will have an impact not only on the behavior of retail investors, but also in all likelihood on shaping the future of finance.