Bitcoin Gains Influence Investor Expectations, Attract New Buyers

A recent experiment by the Federal Reserve Bank of Cleveland found that Bitcoin's past performance can influence investors' expectations for future returns, potentially drawing new buyers into the cryptocurrency market.

The study, part of the working paper 'Do You Even Crypto, Bro? Cryptocurrencies in Household Finance,' involved dividing participants into groups and providing them with different pieces of financial information. One group was told that Bitcoin had returned 14.3% over the previous 12 months, while another was shown a Bitcoin price chart covering the same period.

The researchers found that both treatments increased participants' expected return for the following year, with those who received Bitcoin's exact return information raising their expectations by 3.2 percentage points and those who saw the Bitcoin chart increasing theirs by about 1.2 percentage points.

This shift in expectations directly fed into desired portfolios, with the Bitcoin treatments increasing the amount respondents wanted to allocate to crypto by about 2 percentage points from a control-group average of 4.3%. The majority of this additional exposure came from money respondents would otherwise have kept in checking, savings, or cash accounts.

The researchers later surveyed the participants again and found that those who received Bitcoin information were more likely to report owning crypto, with participants who saw the Bitcoin price chart being 2.48 percentage points more likely to own it than the control group.