Key Takeaways
- Bitcoin remains poorly understood, creating a potentially large pool of future buyers.
- Information about past bitcoin price returns can significantly increase both expected returns and investors’ desired BTC allocation.
- Different beliefs and limited understanding may help explain why bitcoin remains one of the most volatile assets.
In recently published research, aptly called “Do You Even Crypto, Bro? Cryptocurrencies in Household Finance” and based on repeated large-scale surveys of U.S. households, the Federal Reserve Bank of Cleveland found that bitcoin and other crypto assets are poorly understood compared with other financial assets and that the knowledge gap itself appears to be an adoption opportunity.
The Reasons for (Not) Owning BTC
For example, insufficient information about the asset class is still cited by respondents as the main reason why people do not own crypto assets, while the second most popular reason is that they consider it a bad investment.
However, the reasons for owning “crypto” don’t demonstrate a great understanding of this asset class and technology either. Here, the two main reasons for owning BTC or other crypto assets are to invest profitably and diversify an investment portfolio, and not because of the possibilities the technology itself brings, including independence from banks.
This is also corroborated by other findings of the research. The authors of the paper randomly showed people information about BTC’s previous 12-month return, which increased their desired bitcoin allocation by ~47%, while also increasing their expected returns by a few percentage points. Meaning, their willingness to invest in bitcoin was fueled not necessarily by an understanding of what they’re investing in, but more by the past performance of BTC.
Crypto Lottery
However, this is also understandable, given that, according to the survey, BTC gains appear to be treated more like lottery winnings than conventional wealth.
“Hence, realized crypto returns result only in immediate, temporary, one-off purchases of big-ticket items rather than a persistent increase in overall spending, consistent with the idea that investors consider crypto gains as gambling income rather than increases in permanent income,” the paper said.
However, existing BTC and crypto holders seem to be more convinced that their “gamble” will pay off, despite having little idea of what its returns might be.
Among respondents willing to rate crypto assets’ risk, about 63% of non-owners gave it the highest risk score, versus about 45% of owners. Yet crypto asset owners were also more uncertain about their bet. 84% of respondents said “I don’t know” when asked to forecast crypto’s 12-month return, compared with 68% for stocks, 74% for bonds and 78% for gold.
Meaning and Bitcoin Price Discovery
These findings shouldn’t be surprising, as, in the case of Bitcoin, the network and the blockchain, and bitcoin, the asset, there’s still no common agreement on what they are and how it all can be valued. Narratives come and go, different camps keep clashing, analysts keep inventing new metrics and retiring old ones, while the broader market seems to be not too interested in what builders are building.
To make it even more complicated, Bitcoin doesn’t have a CEO or a chief marketing officer who can say what this technology and the asset are. However, the fact that Bitcoin can be many things is also considered to be its value strength by some analysts.
In either case, this volatile understanding directly translates into bitcoin price volatility.
“The absence of common information and beliefs about crypto across investors suggests that price volatility will continue to be one of the most defining characteristics of this new asset for the foreseeable future,” the Federal Reserve Bank of Cleveland concluded. In turn, as Bitcoiners work hard to close the knowledge gap, these efforts, alongside price rallies, might turn today’s uninformed non-owners into BTC holders.
