Thrill-seekers and adrenaline junkies are more likely to become cryptocurrency traders, a study has found. Investors who trade cryptocurrency also tend to take bigger risks in the stock market, says the study, titled ‘Are Cryptocurrency Traders Pioneers Or Just Risk-Seekers? Evidence From Brokerage Accounts’, which explores cryptocurrency trader behaviours and psychology. The study, which was published in the September issue of Economic Letters, ultimately concludes that perhaps – rather than being the forward thinking, market-savvy investors we perceive them to be – crypto traders are moreover simply “driven by excitement-seeking”.
Cryptocurrency traders play a dangerous game. Dealing in invisible and possibly non-existent currency is by definition fraught with risk, particularly if that currency type is decentralised and dependent upon blockchain technology – a technology which, though it can be defined simply, is really a very complex concept for the average person to grasp. While making a purchase using cryptocurrency is a medium of exchange that uses cryptographical functioning to conduct financial transactions, enabling transparency, decentralization and immutability; bitcoin currency exchange differs a little in that it involves an online platform that acts as an intermediary between buyers and sellers of the cryptocurrency. Crypto exchange has become an industry in itself, with crypto trading bot capable of talking directly to financial exchanges and placing and selling orders automatically on behalf of the client, and with start-ups dedicated to creating safer, less hackable exchange platforms.
The “thrill-seeking” behaviours of crypto traders could be associated with the fact that cryptocurrencies are far more volatile than traditional stocks, often moving by more than $1,000 in just a number of minutes – something rarely seen in equity markets. Already this year,crypto’s most popular currency, bitcoin, has attracted the attention of regulators with its huge drops and gains and volatile movements, prompting regulators to issue warnings of the very real risks of virtual currency trading. Not to mention the fact that cryptocurrency trading is the trading of a non-tangible asset or ‘virtual’ investment making it therefore an extremely risky investment, unlike real estate, a car or other assets that produce real income such as stocks, bonds, or mutual funds. Some have likened crypto trading to ponzi schemes, in that those who initially create the cryptocurrencies (bitcoin miners, Ripple, and so forth) will have profited greatly at the expense of those who are holding cryptocurrency stock when these schemes collapse.
But despite warnings and cautions, more and more people are rushing in, eager to make their fortune as quickly as possible. Thrill-seekers, as well as fortune-seekers, it seems. And it’s not surprising that stock traders are more likely to take more risks in equities after dabbling with cryptocurrencies, as the aforementioned study found. Its authors also observed that the increase in risk-seeking in stocks is particularly pronounced when volatility in cryptocurrency returns is low.
What is interesting about the findings, is that it challenges the notion that crypto trading is the new “safe” way to make money. Perhaps worse for those who have invested in a cryptocurrency is that it affirms that crypto traders are perhaps driven more by excitement than by sense, given that people who engage in crypto trading seek risks and want intensive trading activity.
Researchers Matthias Pelster from the University of Paderborn, Bastian Breitmayer of Queensland University of Technology and Tim Hasso of Bond University used brokerage data to assess the impact of cryptocurrency trading on investor behavior in the stock markets to find the data. Their findings support the results of similar studies that have been conducted on the psychology of investors, with research suggesting thrill-seeking and youth are closely linked to excessive stock trading. In fact, it has been found that in Finland, fast drivers are more likely to be fast traders, and in Germany “entertainment-driven” clients traded twice as much as clients who were investing for profits rather than pleasure. Research conducted by behavioural finance experts Brad Barber and Terrance Odean proves that “those who trade the most are hurt the most”: of a study of more than 66,000 trading accounts at a US brokerage, those with the most active clients underperformed the least active by more than 7 percentage points annually.
What to make of the research findings? When trading crypto, one is playing a dangerous game. The best way of keeping one’s investment as safe as possible is to diversify beyond bitcoin trading, for example. To have a diversified portfolio of different assets, digital currencies can be a valuable part of this but they must be complemented by other tangible assets. It is also recommended that traders do their research before investing, and become familiar with the concept of leverage. If investing cryptocurrencies through a ‘contract for difference’ or ‘spread bet’ both losses and gains could be magnified by leverage, making it very well worth consideration. Above all else, it is recommended that you understand and appreciate cryptocurrency for what it is: as a virtual “thing” that actually has no real world value at all, and known by many as possibly the greatest scam in history.