Crypto Continues to Serve as Case Study in Behavioral Economics

If your friends all jumped off a bridge, would you join them?

This classic parental comeback could be due for a 21st-century update along the lines of, “if everyone told you cryptocurrencies were going to go up, would you buy more?”

This, as a paper titled, “Do You Even Crypto, Bro? Cryptocurrencies in Household Finance,” published by the University of Chicago economics institute and National Bureau of Economic Research (NBER), shows that yes — most cryptocurrency holders would, in fact, buy more.

Fortunately for them, Bitcoin is on its longest hot streak in two years.

Unfortunately for them, crypto’s future in the U.S. remains as shrouded as ever, with its shiny object appeal increasingly being dulled by ongoing industry turmoil and regulatory scrutiny.

But who exactly are “they,” these crypto holders?

Per the paper by academics Michael Weber, Bernardo Candia, Olivier Coibion, and Yuriy Gorodnichenko, those holding cryptocurrencies are different from the average population — they are “disproportionately” male with higher incomes, self-describe as Libertarian or otherwise politically independent, are less likely to be white, and generally skew demographically younger.

Digital assets have always served as a polarizing lightning rod for consumers, and the report noted that even when individuals are provided with greater information about digital assets, they often reach very different conclusions about their financial viability.

While most individuals owning cryptocurrencies say that crypto represents a small fraction of their financial wealth, almost one in five reported that cryptocurrency accounts for at least 50% of their financial holdings.

See Also: How Blockchain and Digital Assets Can Free Up Capital Trapped in Cross-Border Treasury Flows

Crypto exists on a separate financial island for households

In a conversation last week, Lou Grilli, senior innovation strategist at PSCU, told PYMNTS that he continued to see demand for crypto “from millennials and bridge millennials, who may have more money and can afford to take on a little bit of risk.”

PYMNTS own 2023 research in “Credit Union Innovation: Bridging the Cryptocurrency Divide,” a collaboration with PSCU, shows that just under 1 in 3 U.S. consumers own cryptocurrency (31%), and those who do tend to take crypto into consideration when making a host of financial decisions, including where they bank.

“It’s important to provide people with enough information to make educated choices,” Grilli told PYMNTS, emphasizing that “this doesn’t mean convincing them that crypto is good in any way.”

The data shows that half (50%) of consumers’ lack of knowledge about the digital asset sector is one reason they do not use cryptocurrency.

This is backed up by the UChicago paper, which finds that a “lack of knowledge” about cryptocurrency is the biggest reason individuals do not hold any digital assets in their personal portfolios.

While certain observers maintain that the more consumers are educated about crypto’s possibilities, the more willing they may be to experiment with crypto products, it turns out that the second most common set of reasons for individuals choosing not to hold any crypto is that they simply consider it a bad investment.

So, while someone might be aware of the asset class, they may still look askance at it as a risky or bad investment that won’t contribute to their personal finance goals relative to alternative options.

In general, crypto is widely perceived differently from other financial assets — and exists on a conceptual island regarding expected returns or perceived risks.

Hitting the lottery 

Regarding that conceptual island, crypto holders most commonly justify their decision through the high expected returns of cryptocurrency, the academics said.

Earnings from crypto seem to be perceived more like lottery winnings and therefore spent on one large purchase rather than a persistent increase in wealth, they explained.

Interestingly, changes in Bitcoin prices translate into more purchases.

PYMNTS research in the report, “Shopping With Cryptocurrency: Tech-Driven Consumers Drive Market Acceptance,” found that one in every three (33%) of the most tech-fluent consumers specifically purchase cryptocurrencies to use them to make purchases with merchants.

Dr. Yan Zhang, co-founder of Web3-native payment aggregator Pelago, told PYMNTS last month that “traditionally, the biggest hurdle for crypto payments is that customers don’t consider crypto as money [rather, they viewed it as more of an investment], so merchants have been hesitant to accept crypto payments.”

For all PYMNTS crypto coverage, subscribe to the daily Crypto Newsletter.