The Bank of International Settlement (BIS) is a global financial institution that acts as a forum to promote economic discussion and policy analysis. According to its website, the mission of the BIS is to "support central banks' pursuit of monetary and financial stability through international cooperation." Therefore, the BIS is often referred to as the central bank for all central banks around the world.
The BIS also serves as a center for economic and monetary research. As such, it regularly publishes 'Working Papers' on numerous facets of the financial world. On November 14, officials from the Monetary and Economic Department of the BIS published Working Paper #1049 titled "Crypto trading and Bitcoin prices: Evidence from a new database of retail adoption".
The report investigates the primary factors that drive crypto adoption. Its findings are based on the retail use of crypto exchanges across 95 countries for a period of seven years spanning 2015 to 2022.
It sheds light on multiple factors that deal with crypto adoption based on age demographics, trading strategies, and market sentiments. Here are some of the key findings from the report.
Crypto adoption increases when BTC prices increase
The report states that crypto adoption rises considerably when the price of Bitcoin begins to rally. This indicates that investors are drawn to cryptocurrencies due to increasing price valuations, not because they resent traditional banking systems, lack trust in public institutions or see BTC as a store of value.
If we look at the facts to support the statement, Bitcoin prices experienced a staggering jump from $250 in 2015 to an astonishing $69,000 in November 2021. Simultaneously, daily active users (DAUs) increased from 119,00 to 32.5 million. The study also states that new monthly active users on crypto exchange apps spiked during the price rallies in late 2017 and early 2021.
Most investors have lost money on BTC
The study shows that, in the last seven years, nearly 75 percent of all users downloaded crypto exchange apps when BTC was trading above $20,000. Assuming that they also purchased BTC at that point, the report estimates that nearly 81 percent of all these investors are currently in the red, especially with BTC presently languishing at $16,975.
The above graph demonstrates that, apart from a handful of investors who made substantial gains, most investors incurred losses. Blockchain intelligence firm, Glassnode also backs this notion, albeit with more conservative figures.
It states that only half of all Bitcoin addresses are in the green at the moment. "$BTC Percent Addresses in Profit just reached a 2-year low of 51.881 percent," the firm said in a Novemver 14 tweet.
📉 #Bitcoin $BTC Percent Addresses in Profit (7d MA) just reached a 2-year low of 51.881%
View metric:https://t.co/ik5IkrdoPk pic.twitter.com/boVDTqG8YL— glassnode alerts (@glassnodealerts) November 14, 2022
The demographic study of crypto users
The paper also provides insight into the demographics of crypto users worldwide. Research finds that nearly 40 percent of crypto users are men below 35. The second-largest demographic were men between the ages of 35 and 54, who accounted for 25 percent of all crypto users.
It's a similar story with women, with most female crypto investors being below 35. This could be because younger individuals are more open to risk and do not mind the volatility of cryptocurrencies (more on this in the next point).
In terms of location demographics, over the period of analysis, crypto exchange app adoption was highest in Turkey, Singapore, the US and UK. In contrast, it is lowest in Japan, Mexico, Indonesia, India and China.
The study cites legal restrictions for lower crypto adoption in India and China. While in the UK, individuals associate crypto with gambling, where winning and losing are just part of the process.
Risk appetite for US consumers aged between 20–79
Research shows that in the US, young men have more risk appetite and tend to react more to price movements than older men and women. Another interesting finding is that Android users, who are low-income investors according to the BIS study, are more likely to use crypto exchange apps after prices have risen. As such, Android users are more open to risk than iOS users.
Behavioural differences among larger and smaller investors
The supply of Bitcoin is limited to 21 million tokens, and the study clearly showed that retail investors tend to enter the market when prices spike. This raises one glaring question, who is selling their BTC holdings during these price rallies?
The paper makes a comprehensive analysis of the wallet holdings on the Bitcoin blockchain to find an answer to this question. Complementary on-chain data allowed the researchers to inspect and differentiate between small, medium and large Bitcoin holders, such as whales and the even bigger humpbacks, who have more than 100,000 BTC in their wallets.
Studies show that small and medium Bitcoin wallets generally increase in value when the overall price of the token increases. However, it is quite the opposite in the case of whales, who usually prefer selling during that period. Therefore, these affluent investors profit as retailed investors flood the market looking to get in on price rallies. The result? The rich get richer, and you know the rest.
In Conclusion
The paper succeeds in establishing that the rise in the usage of crypto exchange apps is directly proportional to the increase in crypto prices. It also indicates that most investors buy in at the wrong time – when prices are high – and as a result, end up with unrealized losses on their crypto holdings.
Therefore, a smarter move would be to buy when prices are low or adopt dollar cost averaging to lower the acquisition costs. However, crypto markets are highly volatile. Therefore, you should conduct thorough research and invest only as much as you are comfortable losing completely.
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