Working Paper: NBER ID: w31317
Authors: Shimon Kogan; Igor Makarov; Marina Niessner; Antoinette Schoar
Abstract: Trading in cryptocurrencies has grown rapidly over the last decade, primarily dominated by retail investors. Using a dataset of 200,000 retail traders from eToro, we show that they have a different model of the underlying price dynamics in cryptocurrencies relative to other assets. Retail traders in our sample are contrarian in stocks and gold, yet the same traders follow a momentum-like strategy in cryptocurrencies. Individual characteristics do not explain the differences in how people trade cryptocurrencies versus stocks, suggesting that our results are orthogonal to differences in investor composition or clientele effects. Furthermore, our findings are not explained by inattention, differences in fees, or preference for lotterylike stocks. We conjecture that retail investors hold a model of cryptocurrency prices, where price changes imply a change in the likelihood of future widespread adoption, which in turn pushes asset prices further in the same direction.
Keywords: Cryptocurrency; Retail Trading; Investor Behavior
JEL Codes: G12; G14; G41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| contemporaneous returns (G14) | changes in portfolio share for cryptocurrencies (G11) |
| changes in portfolio share for cryptocurrencies (G11) | price dynamics (E30) |
| positive returns (G12) | perceived likelihood of future adoption (D84) |
| perceived likelihood of future adoption (D84) | price dynamics (E30) |
| individual characteristics (Z13) | variance in trading strategies (C58) |
| contrarian behavior in stocks and gold (G41) | trading strategies (G13) |
| momentum-like strategy in cryptocurrencies (G13) | trading strategies (G13) |