Distrust of Fiat Money Is Not Enough to Invest in Crypto

Summary

• A new BIS working paper finds cryptocurrency investors tend to be young, educated, digital native males.
• Their overarching motivation to invest in digital currencies is unrelated to distrust of fiat currencies or regulated finance.
• This means cryptocurrency investors’ goals are the same as those of investors in other asset classes, and so technology-neutral regulation could actually increase participation.

Introduction

Cryptocurrencies offer a digital alternative to fiat money and commercial banking. A key rationale behind their development was their resistance to debasement and regulation by public or private institutions. However, unregulated middlemen, fraud and theft have made it hard to view digital currencies as any more trustworthy than their hard currency counterparts.

And so, a new BIS working paper investigates whether cryptocurrencies are indeed sought due to distrust of fiat currencies or regulated finance. Using data from the US Survey of Consumer Payment Choice, the authors build a profile of the typical US cryptocurrency investor and determine their motivations. They find:

• Cryptocurrency investors have the same level of security concerns with either cash or commercial banking services as the general population.
• Cryptocurrency investors are generally more educated, younger, and more likely to use mobile apps and PayPal for their daily transactions. Ether and xrp owners are the most educated.
• New cryptocurrency investors will become harder to find as time progresses, but once an investor has entered the asset class, they struggle to leave.

Data and Methodology

The authors use data from the Survey of Consumer Payment Choice (SCPC), provided by the Federal Reserve Bank of Atlanta. The SCPC is an annual survey covering 2014-19. It aims to give an overview of US customers’ payment behaviour regarding cash, electronic payments and cryptocurrencies. Overall, around 1,200-3,400 individuals respond to each survey.

Importantly, the SCPC asks whether a person is aware of one or more cryptocurrencies and whether that person owns any cryptocurrencies. It also requires respondents to classify the security and convenience of cash, bank account number payments and online banking bill payments. And lastly, the information can be sorted by characteristics, such as age, gender, race, region, education level, and household income.

On methodology, the authors run regressions (linear probability model) to determine whether an individual’s ownership or knowledge of cryptocurrencies can be explained by their level of digitalisation, their concerns over the security and convenience of traditional finance, and/or any of their characteristics. The level of digitalisation is a function of the payment methods individuals frequently use (debit, mobile or PayPal).

The SCPC Sample

The authors focus specifically on the 2019 SCPC, completed by 3,372 individuals. 73% knew of at least one cryptocurrency, but just 1.4% owned a cryptocurrency in 2019. Concerning digitalisation, 81% of respondents have a debit card, 25.4% have used a mobile app to pay, and almost 40% have used PayPal at least once to make an online purchase in the past 12 months.

In the sample, the average household salary was between $40,000 and $49,999, 43.6% of respondents were men, most were married, the average age was 53, and 84% were white. The average respondent also classified the security and convenience of fiat money and commercial banking as closer to ‘neither inconvenient nor convenient/risky nor secure’ than ‘inconvenient/risky’.

Who Owns Cryptocurrencies?

The authors find digitalisation level positively impacts ownership and knowledge of cryptocurrencies. For example, having a debit card, using a mobile app for payments and using PayPal increase the probability of investing in cryptocurrencies by 1.9pp, 3.5pp and 2pp, respectively. In other words, individuals more comfortable with digital payments are more likely to own cryptocurrencies.

Crucially, the findings also show the demand for cryptocurrencies is not driven by distrust of cash or the financial industry, given there are no differences in the perceived security of cash and offline and online banking. However, compared with non-owners, cryptocurrency investors tend to find traditional banking services less convenient.

Regarding broader socioeconomic characteristics, education, income, being a man and being married positively influence knowing about or owning a cryptocurrency, or both. Meanwhile, each additional year of age reduces, on average, the probability of owning a cryptocurrency by 0.1pp, and being retired reduces it by 1-1.7pp. These results concur with the literature: broadly speaking, younger adults and particularly males are more risk inclined. Also, financial market participation is generally found to increase with education.

How Many Cryptocurrencies Do You Own?

The results above reveal who is more likely to be a cryptocurrency investor. However, the authors also profile those who are already cryptocurrency investors. Specifically, what determines how many cryptocurrencies an individual invests in?

On this front, education and income no longer play a key role. That is, a more educated or wealthy cryptocurrency investor is not more likely to invest in a wider set of digital currencies. Meanwhile, younger males and married males are more likely to own more cryptocurrencies.

Are There Differences Across Cryptocurrencies?

Unsurprisingly, bitcoin has twice as many investors in the sample than any other cryptocurrency (Chart 1). However, owners of ether and xrp are generally more educated than the average, while Litecoin investors are the least educated in the sample (Chart 2). Lastly, owners of xrp, ether and stellar tend to be the wealthiest.

Cryptocurrency Trends

In 2014, just 40% of US citizens were aware of cryptocurrencies. This increased to over 70% by 2019 (Chart 3). Despite this, under 2% of US consumers owned a cryptocurrency in 2019. While the link between knowledge and ownership is immediate, the authors believe crypto’s pervasiveness means new investors are now less likely to come from new people learning about the topic. This implies that many of the retail investors who would have invested in cryptocurrencies have already done so. Those that have not appear to be looking for other signals before investing.

On the other hand, the authors find that existing cryptocurrency investors are far more likely to remain in the asset class. Specifically, owning a cryptocurrency in 2016, 2017 and 2018 increases the probability, on average, of owning a cryptocurrency in 2017, 2018 and 2019 by 61pp, 56pp and 55pp, respectively. In other words, those who invested in cryptocurrencies in the past are likely to remain invested.

Bottom Line

Pinning down the exact appeal and function of cryptocurrencies is somewhat subjective. This makes them particularly difficult to value and appraise. However, distrust of fiat money and commercial banking is apparently not the main motivation behind moving into the decentralised finance space. If true, what distinguishes a cryptocurrency investor from an investor in any other asset class? According to the authors, little. In fact, a greater regulatory and supervisory framework may actually entice many new investors, while existing investors are much less likely to leave.

Citation

Auer R., Tercero-Lucas, D., (2021), Distrust or speculation? the socioeconomic drivers of U.S. cryptocurrency investments, BIS, (Working Paper 951), https://www.bis.org/publ/work951.htm

Authors of Working Paper

Raphael Auer previously spent three years in MED’s Monetary Policy unit. Prior to that, he worked for 10 years at the Swiss National Bank, including as Deputy Head and Economic Advisor of the International Trade and Capital Flows unit. During 2009-10, he was Globalization and Governance Fellow at Princeton School of Public and International Affairs and visiting fellow at the Federal Reserve Bank of New York. He holds a PhD in economics from MIT and serves as president of the Central Bank Research Association.

David Tercero-Lucas is a PhD Candidate at Universitat Autònoma de Barcelona. His main research areas are Digital Economics (Cryptocurrencies, Stablecoins and Central Bank Digital Currencies), Monetary Policy, Payments and Applied Economics. He has also been part of the Associate Team of the Digital Euro Association (DEA) and worked as a Research Assistant at Bank of Spain.