Crypto Volatility Driven by Investor Beliefs, Not Just Market Fundamentals

A new study from the Federal Reserve Bank of Cleveland has found that investor beliefs play a significant role in driving cryptocurrency volatility. The researchers used repeated surveys of up to 25,000 US households per wave and discovered that expectations about crypto returns explain more of the variation in who owns cryptocurrency than demographic characteristics.

The study found that people who own cryptocurrency expect an average return of 22% over the following year, compared with just 7% among non-owners. This expectation gap is enormous and suggests that investors have sharply different views about the prospects of cryptocurrencies.

A randomized information experiment showed that simply giving people information about Bitcoin's recent performance can increase both their desired crypto allocation and subsequent purchases. The effect was concentrated among people who said they didn't own cryptocurrency because they lacked sufficient information.