Crypto Investors Driven by Beliefs, Not Just Returns

A new study from the Federal Reserve Bank of Cleveland provides insights into why cryptocurrency behaves so differently from traditional financial assets. Researchers found that Americans who buy crypto don't simply have different demographics or risk appetites, but rather 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 a randomized information experiment. The results show that expectations about crypto returns explain more of the variation in who owns cryptocurrency than demographic characteristics.

People who own cryptocurrency expect an average 22% return over the following year, compared with just 7% among non-owners. Owners also tend to view cryptocurrency as less risky than non-owners do. The researchers found that expected returns are unusually powerful in determining ownership, with a one-percentage-point increase associated with an 0.8-percentage-point increase in the probability of owning cryptocurrency.

The study suggests that crypto's volatility may be rooted partly in disagreement and learning rather than simply market fundamentals. The authors conclude 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.