The ups and downs of the crypto markets provide fertile ground for speculators and gamblers. The scope for significant price movement over a matter of days or even hours means there’s money to made for crypto investors from shrewd trading.
Yet for some would-be investors, this greatest strength is its greatest weakness. While there are opportunities there for profitable trading, cryptocurrencies remain too volatile for most institutional and regulated investors. For example, these investors need to account for these risks to their stakeholders.
Now, a new study has confirmed that crypto investors tend to be those most drawn to risky types of investment. Diversification is not the goal.
Study Confirms Crypto Investors Are Thrill Seekers
In a paper entitled “Are Cryptocurrency Traders Pioneers Or Just Risk-Seekers? Evidence From Brokerage Accounts”, academics Matthias Pelster (University of Paderborn), Bastian Breitmayer (Queensland University of Technology) and Tim Hasso (Bond University) said crypto investors were spurred on by “excitement-seeking”.
“We find that when engaging in cryptocurrency trading investors simultaneously increase their risk-seeking behavior in stock trading as they increase their trading intensity and use of leverage.”
The report draws on data from brokerage accounts, matching the impact of crypto trading to stock market investment behaviour. Across a sample running from January 2014 to December 2017, covering over 668,000 traders, the research found traders were more likely to trade, and with greater leverage, within 10 days of their initial cryptocurrency investment.
Within 10 days of first crypto trading activity, the study found traders would execute an additional 16.8 trades. These came at a degree of leverage some 13.4% higher than a control sample. The figures were most prevalent in the 35-44 year old age group, followed by 25-34 year old traders.
Intriguingly, these figures overlap closely with key online gambling and sports betting demographics. According to figures published by the UK Gambling Commission for 2018, gambling (excluding the National Lottery) was an activity most likely pursued by 25-34 year olds. Some 40% participate on a regular basis.
The study concludes that cryptocurrency markets and gambling fit hand in glove. Therefore, it likely attracts the same types of participants. But why?
Bitcoin as a Safe Haven?
The narrative of bitcoin as a safe-haven investment has been an increasingly prominent feature of the crypto press in recent months. Commentators have repeatedly linked turbulence in other markets to peaks in bitcoin and other cryptocurrencies. But does this stand up to scrutiny?
If this were true, the report should find no correlation between cryptocurrency investment and stock market behaviour. If bitcoin were a new safe-haven asset, it should be the case that investors are buying and holding for the longer-term. This should be irrespective of their stock market preferences.
In reality, the report dismantles this analysis, showing that speculation on cryptocurrency is more akin to gambling. Therefore, people believe it to be a shorter-term investment prospect by crypto traders.
The Thrill of the Ride
Bitcoin is hugely volatile when looking at other instruments and investments. Within a matter of minutes, BTC prices can fluctuate by $1,000 or more in response to developing news – volatility that is uncommon in other investment markets.
The rises and falls of bitcoin prices mean this is not a market for the faint-hearted. Especially given the comparative levels of liquidity, and the comparative lack of transparency in crypto as opposed to other investment. It needs a particularly strong stomach to ride the long-haul.
However, on a shorter term prospectus, the swings in price from bear to bull cycles offer returns from crypto that are hard to match anywhere else.
A recent report called out bitcoin as 2019’s best performing asset, despite trading undulations, after a 114% increase on the year. This is significantly beyond the 31% gains seen in US tech stocks over the same period.
The report calling out crypto investors as thrill-seekers seems to make sense. Those that speculate on bitcoin and other cryptocurrency markets do so in the knowledge that the stakes are high. However, the risks are plentiful.
But as with all high risk investments, the upside too is significant. Beating all other instruments hands-down in 2019 so far, the rewards from successful bitcoin speculation are strong. For individual traders and speculators, it comes down to risk appetite, and whether they are brave enough to take that chance.