Crypto Investors Driven by Beliefs, Easily Swayed by Returns

A new study by the Federal Reserve Bank of Cleveland sheds light on why cryptocurrency behaves so differently from traditional financial assets. The research found that Americans who buy crypto have radically different beliefs about digital assets' future returns.

The study, titled 'Do You Even Crypto, Bro? Cryptocurrencies in Household Finance', used repeated surveys of up to 25,000 US households per wave and found that expectations about crypto returns explain more variation in who owns cryptocurrency than demographic characteristics. The researchers discovered that people who own Bitcoin (BTC) expect an average 22% return over the following year, compared with just 7% among non-owners.

The study also conducted a randomized information experiment, showing that giving people information about BTC's recent performance can increase both their desired crypto allocation and actual purchases. The researchers found that simply telling households about Bitcoin's previous 12-month return increased their desired crypto portfolio allocation by roughly 2 percentage points, or about a 47% increase relative to the control group.

The study suggests that cryptocurrency stands out because it is poorly understood, investors form sharply different views about its prospects, and new information about past returns can change both expectations and behavior. The authors conclude that price volatility will continue to be one of the most defining characteristics of this new asset for the foreseeable future.