The market drawdown and UST/LUNA fiasco may discourage some retail newcomers, but younger investors remain captivated by crypto’s technology.
These can be anxious times for holders of cryptocurrencies, especially those who entered the market in late 2021 when prices were cresting. Bitcoin (BTC), Ether (ETH) and especially altcoins now appear to be undergoing a major reset, down 50% or more from November highs.
Some worry that a whole generation of crypto adopters could be lost if things crumble further. “If the market decline continues, it will become too painful and retail investors will bail,” Eben Burr, president of Toews Asset Management, told Reuters earlier this month. “Everyone has a breaking point.”
But, all the gloom and doom could be overdone.
It’s “unnerving,” acknowledged Callie Cox, United States investment analyst at eToro, but it’s only par for the course for a market that scarcely existed a decade ago. Bitcoin, arguably the most “institutionalized” digital coin, “has actually gone through 16 drops of 50% or more over the past 10 years,” she told Cointelegraph.
The current correction hasn’t deterred younger investors, according to Cox. “We surveyed 1,000 investors across age groups in March, and 58% of investors ages 18–34 thought Bitcoin would present the best buying opportunity in crypto over the next three months.”
Still, more recently, in early May, Glassnode reported that 40% of Bitcoin holders were underwater on their investments at a time when BTC was $33,800; it was $29,000 this past weekend on May 28. Are younger investors still as optimistic as they were in March?
“Retail traders between 35-45 years old decreased their crypto balances amid market volatility in the last few weeks,” Bobby Zagotta, CEO of Bitstamp USA and chief commercial officer at Bitstamp Global, told Cointelegraph. By contrast, “Our younger users seem to be more bullish and have chosen not to sell.” He added:
“Given the macroeconomic headwinds, every asset class is risk-off right now. That said, crypto and Bitcoin, in particular, are showing pretty amazing resilience.”
Has LUNA’s collapse shaken newcomers?
Not everyone is so sanguine, however. During the last bull run, retail investors were increasingly drawn to the most speculative investments, perhaps hoping to duplicate the spectacular gains of crypto’s earliest adopters, Lennix Lai, financial markets director at crypto exchange OKX, told Cointelegraph. Ether and Bitcoin are down some 50% from their late 2021 peaks, but many altcoins have plummeted even further. Meanwhile, the mid-May collapse of Terra (LUNA) and TerraUSD (UST) has shaken the whole crypto sector, said Lai, adding:
“The devastating impact of the LUNA crash will certainly have soured crypto’s perception among less sophisticated investors — the damage done to retail sentiment will take time to recover from.”
Still, Lai doesn’t believe that retail investor trust in cryptocurrencies has vanished. Rather a lesson has been learned. “Bearish markets teach everyone that the nature of crypto — in addition to other asset classes — is volatile.”
Are the young inherently optimistic?
In a 2021 paper, two researchers explored the impact of investors’ beliefs on cryptocurrency demand and prices. Focusing primarily on the 2017–2018 bull market, they found that “younger individuals with lower income are more optimistic about the future value of cryptocurrencies, as are late investors.” In particular, “‘fear of missing out,’ and contagious social dynamics may have contributed to a rampant increase in cryptocurrency prices.”
Could the same dynamic be at play in the late 2021 price run-up? “I would speculate that not much has changed in terms of how educated/sophisticated the average crypto investor is,” Giovanni Compiani, one of the paper’s co-authors and assistant professor at the University of Chicago Booth School of Business, told Cointelegraph, “given that, to my knowledge, there haven’t been any major education campaigns or any policy changes that would make it harder for unsophisticated investors to trade.”
If this is the case, then one might expect these late-comers or younger-aged crypto enthusiasts to be bailing out around now, but that isn’t necessarily happening. When asked about first-time retail investors, Cristina Guglielmetti, financial adviser and president of Future Perfect Planning, told Cointelegraph:
“The clients I have who own cryptocurrency haven’t really sold their holdings from last year to this year. They’re looking at it more as an educational experience and not assigning an expected return per se. They’re expecting it to be speculative and very volatile.”
Will new customers be hard to find?
Even if latecomers aren’t fleeing en masse, won’t it still be difficult to attract new retail customers given the scorching some have suffered?
“We’ve seen crypto bear markets before,” said Zagotta, “just as we’ve seen rallies. We are a part of a new financial ecosystem developing minute by minute and led by some of the smartest minds of our time, so my bet is always going to be on innovation versus stagnation.” Moreover, he told Cointelegraph:
“Headlines might have you believe that there’s more volatility than there really is and that investors are fleeing when prices fluctuate. But, that’s not really happening.”
“Crypto’s issue isn’t necessarily price, it’s education,” said Cox. Forty-two percent of investors surveyed by eToro in March said they don’t buy crypto because they simply don’t know enough about it: “But, the appetite for decentralization and digital transformation is still there, especially among younger investors.”
Cox does not accept the assumption held by some that younger investors are flighty and quick to run at the first resistance. On the contrary, “younger investors naturally have higher risk appetites, and they’ve seemed willing to stomach these swings because of their longer-term optimism about the technology.”
“Although some investors will be lost for good, each market cycle sees newcomers becoming believers in the technology,” added Lai. “Investors who abandoned crypto in 2018 and returned in 2021 are more likely to stick around, as they now realize that the industry doesn’t die during market downturns and that investments made during the lows have historically been most lucrative.”
Meanwhile, “the open interest at OKX keeps increasing even when the market is bearish, indicating that users are not leaving the market,” said Lai. “We do expect investors to lower their leverage and maintain their positions, however.”
Are retail customers even needed?
Maybe we’re worrying too much about individual investors. Last week, JPMorgan Chase, the banking giant, was reported to be experimenting with blockchain technology for collateral settlements. If large institutional players like these are bullish on the technology, maybe it doesn’t even matter what retail investors do?
“Both retail and institutions are critical for the continued adoption of digital assets,” said Zagotta. “Institutional interest certainly establishes maturity and confidence towards all other investor classes.”
“What really matters for the industry is that good products are delivering real value to users,” added Lai. Institutional is only part of the ecosystem, though a crucial part. “The presence of institutional players in the sector fosters fair pricing of crypto assets and better liquidity.”
What advice, if any, would Lai offer new crypto investors? “DYOR,” or do your own research. “Crypto is still an emerging asset class with a relatively short history compared to the traditional finance market. Some of the tokenomics, despite being very promising, are still experimental.”
“Know what you’re investing in,” added Cox. Investors have different goals, needs and risk tolerances. “So, ultimately, crypto may not be right for your money at this moment. There are risks to investing in an emerging asset class.”
Overall, the crypto story is a compelling one, she continued. The world is moving toward a decentralized future generally, and cryptocurrencies are more inclusive and accessible relative to traditional financial instruments. “Focus on the utility of each coin you’re investing in, and always have an exit strategy in place,” Cox concluded.
Most agree that more education is needed. “Our data shows that 76% of retail investors are excited to see crypto reaching mainstream status within a decade,” said Zagotta. “That means that we see a massive opportunity to support adoption through education. Education and knowledge will create trust amongst regulators and investors.”
In sum, “We haven’t seen investors abandon the crypto space en masse,” said Cox, “but we have seen them become more selective of what crypto they buy.”