Who’s Betting on Crypto? Wealth, Risks, and the Real Investors Behind the Hype

sep. 11, 2024

Are crypto investors risk-hungry thrill-seekers, or do they mirror traditional, financially sophisticated investors? During his visit to Stockholm, Imperial College’s Marco Di Maggio discussed his research on the demographics of cryptocurrency investors, revealing how and why people invest—from responses to income shocks to seeing Bitcoin as an inflation hedge. With the rise of crypto ETFs and the integration of digital assets into mainstream finance, understanding who invests in crypto is more crucial than ever, he says.

What motivated you to explore the demographics of cryptocurrency investors? Were there any characteristics or behaviors that stood out to you as particularly surprising?

The motivation for exploring the demographics of cryptocurrency investors stemmed from the rapid growth in crypto adoption and the need to clarify who these investors are, as this should shape potential regulatory interventions in this space. If low-income individuals are investing their savings in hopes of a windfall, akin to winning the lottery, the risks are quite high as the need for regulatory oversight. However, if cryptocurrency investors are primarily wealthy individuals diversifying their portfolios, the associated risks are significantly lower.

From a regulatory perspective, this study challenges some misconceptions about who crypto investors are. It's easy for regulators to pursue a heavy-handed approach if they assume crypto investors are mostly niche groups like Reddit traders or libertarian ideologues. However, our research, using detailed transaction-level data, shows that most crypto investors closely resemble traditional investors. Over 80% of crypto investors in our study also hold positions in traditional assets like stocks, and many of them have higher incomes and are financially sophisticated. This makes the case for more measured and thoughtful regulation that balances innovation with risk management, rather than simply targeting crypto as a fringe phenomenon. As the market becomes more integrated through vehicles like ETFs, regulators will need to account for the fact that the lines between crypto and traditional finance are blurring, and that investors in both markets are often the same people.

This data-driven approach, which cuts through the headline-grabbing narratives that often depict crypto as either a mysterious, scam-ridden industry or a get-rich-quick scheme, offers a more nuanced and balanced understanding of the space. It’s at the core of my forthcoming textbook, Blockchain, Crypto, and DeFi: Bridging Finance and Technology, published by Wiley. The book equips readers with real data and analytical tools to assess cryptocurrencies and decentralized finance with clarity, moving beyond speculation to provide an informed perspective on how these technologies are reshaping finance.

Your research shows that people tend to increase their crypto investments in response to income shocks, such as stimulus payments. How do you think this behavior reflects broader trends in financial decision-making?

This behavior reflects a broader trend in financial decision-making where households react opportunistically to liquidity shocks by channeling new disposable income into risky assets like cryptocurrencies.

However, contrary to popular belief that stimulus check money predominantly flowed into crypto, our research shows that investors actually allocated more of these funds to traditional investments than to crypto. This is a positive sign of investor sophistication, indicating that while they are willing to take risks in the crypto market, they also prioritize more stable, conventional asset classes. This nuanced behavior—balancing riskier investments like crypto with more conservative ones—mirrors a broader societal shift toward greater financial literacy and a diversified approach to personal finance.

You found that crypto investments are more sensitive to market returns compared to traditional investments. Why do you think crypto investors are more reactive, and what does this suggest about the psychology behind crypto investing?

Crypto investors tend to be more reactive to market returns due to the heightened volatility of cryptocurrencies and the speculative nature of this asset class. For example, during Bitcoin's significant price increase in 2017, when its price surged from roughly $2,000 to over $14,000, there was a massive influx of new investors.

In our study, we observed that the number of new investors peaked at over 14,000 per month during this period, with a corresponding spike in transaction volumes. This pattern repeated in 2020–2021, when Bitcoin's price skyrocketed from $10,000 to $50,000, attracting thousands of new participants monthly. This illustrates that investors tend to chase returns aggressively during bull markets, often driven by a "fear of missing out" (FOMO).

The 24/7 nature of crypto markets, combined with the potential for rapid gains, reinforces this reactive behavior. This suggests that the psychology behind crypto investing is partially driven by momentum-based behavior, where investors chase rapid gains more aggressively than they do with traditional assets.

You say that many households view cryptocurrencies as a hedge against inflation, especially during periods of high inflation. What potential risks might this phenomenon pose for less experienced investors, and the economy more generally?

Many households do indeed view cryptocurrencies, particularly Bitcoin, as a hedge against inflation. Even Larry Fink, CEO of BlackRock, has referred to Bitcoin as "digitalizing gold," suggesting that it could play a role similar to gold in protecting against inflation. If Bitcoin were to function as a true inflation hedge like gold, it could indeed provide significant protection against inflationary pressures, as gold traditionally holds its value during times of currency devaluation and economic instability, but BTC is potentially easier to acquire and trade.

However, while Bitcoin has some characteristics that align with those of gold—such as a fixed supply—it remains a much more volatile asset. It’s true that Bitcoin’s volatility has declined in recent years as more institutional investors have entered the market, suggesting that as institutional adoption continues to grow, its price stability could improve further. For example, Bitcoin’s annualized volatility has decreased from over 80% in 2017 to less than 60% in more recent years, and one can expect this trend to continue with greater participation from large-scale investors.

That said, one crucial aspect that prevents Bitcoin from being a perfect hedge is its correlation with overall market sentiment, particularly the "risk-on, risk-off" dynamic. During periods of market stress, when investors flee to safety, Bitcoin often moves in tandem with riskier assets like equities, instead of providing the stability one would expect from a true safe-haven asset. This means that while Bitcoin is increasingly seen as a hedge against inflation, its behavior during financial downturns still reflects its riskier nature.

How do you envision the future of cryptocurrency adoption? Do you anticipate wider adoption across various income levels, or will crypto continue to be more popular among specific groups?

Our research reveals clear demographic trends regarding who is more likely to invest in cryptocurrencies. We found that while early adopters of crypto were predominantly high-income individuals, the current pool of crypto investors is more diverse. Investors in the highest income brackets—those earning over $75,000 per year—account for about 73% of crypto transactions, with the bulk of investment volume also coming from this group. However, there is still significant participation from lower-income groups, with individuals earning less than $45,000 per year making up around 11% of transactions. We also observed that crypto investors are more likely to be financially sophisticated and have higher risk appetites—about 29% of crypto investors in our sample were also gamblers, compared to a significantly lower rate among non-crypto investors. This suggests that crypto attracts a subset of individuals comfortable with risk.

I envision the future of cryptocurrency adoption becoming increasingly broad, transcending income levels, as technological accessibility and financial education improve. Early adopters were predominantly higher-income individuals, but more recent data indicate growing interest from middle- and lower-income groups. As the regulatory landscape matures and institutional adoption increases, we could see cryptocurrencies integrated into everyday financial systems, even as a viable investment option for pension funds, which would facilitate wider participation. However, speculative trading and price volatility may still attract particular demographics, such as younger, tech-savvy individuals who are more willing to take on financial risk.

Why does this study matter? Do you see any spillovers to other asset classes?

This study is crucial because it provides a comprehensive, data-driven understanding of who is investing in cryptocurrencies, which has significant implications for both the market and regulation. One key development in the market is the introduction of Bitcoin and Ethereum ETFs, which are likely to further integrate cryptocurrencies into traditional financial markets. ETFs provide easier access to crypto exposure for retail and institutional investors alike, reducing the technological and knowledge barriers that might have kept some potential investors out of the market. As a result, we can expect crypto assets like Bitcoin and Ethereum to become even more closely correlated with other traditional asset classes as these ETFs attract a broader range of investors.

The integration of crypto into mainstream financial markets through ETFs will likely increase liquidity, stabilize prices, and reduce volatility over time, especially as more institutional investors participate. These developments mean that crypto will no longer be an isolated, speculative market but rather an asset class that is embedded within the broader financial ecosystem, with effects on portfolios that include stocks, bonds, and commodities. This interconnectedness will create spillover effects; for example, price movements in crypto could increasingly influence investor behavior in equities and vice versa.