‘Three quarters’ of private Bitcoin investors are in the red • The Register

Somewhere between 73 and 81 percent of retail Bitcoin buyers are likely to be negative on their investment, according to research published Monday by the Bank of International Settlements (BIS).

In other words: the Bitcoin they bought is now worth less. Bitcoin is down 73 percent in the past year, and up 155 percent in the past five years. Losses are only realized on sale.

The Switzerland-based bank for other central banks wanted to understand why retail investors continue to participate in cryptocurrency exchanges to trade tokens such as Bitcoin. It’s a mystery, given that people don’t typically use cryptocurrencies to make payments, measure values, or finance real-world investments.

The BIS published its findings in a working paper titled “Crypto trading and Bitcoin prices: evidence from a new database of retail adoption.”

The paper’s authors – Raphael Auer, Giulio Cornelli, Sebastian Doerr, Jon Frost and Leonardo Gambacorta – created a database of crypto exchange apps used by retail investors daily in 95 countries between 2015 and 2022.

They found that when the price of Bitcoin rises, more people decide to download and use crypto exchange apps. These users, the researchers observed, are disproportionately younger and male—the most risk-seeking segment of the population. And this group ends up increasing the profits of larger investors, who sell their holdings as new market entrants drive up the price.

“[A]At the time of writing, 73-81 percent of users had likely lost money on their cryptocurrency investments,” the paper reveals. “Analysis of blockchain data shows that as prices rose and fewer users bought Bitcoin, the biggest owners (the so-called ‘whales’ or ‘ humpbacks’) sold – and gave a return at the expense of the smaller users.”

This trend, the researchers argue, invites further scrutiny of claims that cryptocurrencies will “democratize” the financial system.

“Our findings raise concerns that individual decisions are backward-looking and that many retail investors are not fully informed about the risk or volatility of the crypto sector,” the authors conclude.

“This paper seems very accurate and consistent with my lived experience,” cryptocritic and software engineer Stephen Diehl said in a message to The register. “Most came on board during the pandemics, and since then the market has collapsed – so it’s quite surprising that most of them are at a loss.”

The BIS data on Bitcoin losses is consistent with the loss rates experienced by those investing in other highly speculative financial instruments.

In 2011, Justin Hughes, managing member of Philadelphia Financial Management in San Francisco, urged the US Securities and Exchange Commission to regulate foreign exchange trading (retail FX or forex) to protect retail investors.

“[A]About 70 percent of clients lose money every quarter, and on average, 100 percent of a retail client’s investment is lost in less than 12 months,” he wrote. [PDF]. Stronger currency rules [PDF] came two years later.

And in 2016, the UK’s Financial Conduct Authority (FCA) said 82 per cent of retail investors who traded contracts for differences (CFDs) – financial contracts that pay the difference in settlement price between opening and closing trades – lost money.

Hughes observed in the letter that speculators would get better investment results from gambling in a casino, where only 56 percent of players lose come bets in craps or 58 percent lose playing basic strategy in blackjack.

Retail Bitcoin investors don’t seem to get those odds. ®