Swiss bankers warn: Three quarters of retail Bitcoin investors are in the red
Little fish lured into the market help whales cash out
Somewhere between 73 and 81 percent of retail Bitcoin buyers are likely to be into the 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 upon sale.
The Switzerland-based bank for other central banks wanted to understand why retail investors continue to participate in cryptocurrency exchanges to trade tokens like Bitcoin. It's a mystery, given that people don't generally use cryptocurrencies to make payments, to measure value, or to finance real-world investments.
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 fueling the profits of larger investors, who sell their holdings as new market participants drive up the price.
"[A]t the time of writing, 73–81 percent of users had likely lost money on their investments in cryptocurrencies," the paper reveals. "Analysis of blockchain data finds that, as prices were rising and smaller users were buying Bitcoin, the largest holders (the so-called 'whales' or 'humpbacks') were selling – making a return at the smaller users' expense."
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 of the risk or volatility of the crypto sector," the authors conclude.
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"This paper seems very accurate and matches my lived experience," said crypto critic and software engineer Stephen Diehl in a message to The Register. "Most people onboarded during the pandemic lockdowns, and since then the market has collapsed – so it's entirely unsurprising 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 of San Francisco, urged the US Securities and Exchange Commission to regulate off-exchange foreign exchange trading (retail FX, or forex) to protect retail investors.
"[A]pproximately 70 percent of customers lose money every quarter and on average 100 percent of a retail customer's investment is lost in less than 12 months," he wrote [PDF]. Stronger forex regulations [PDF] arrived two years later.
And in 2016, the UK's Financial Conduct Authority (FCA) said that 82 percent of retail investors trading contracts for differences (CFDs) – financial contracts that pay the difference in the settlement price between opening and closing trades – lost money.
Hughes observed in his letter that speculators would get better investment results from gambling in a casino, where a mere 56 percent of players lose "come" bets in craps or 58 percent lose playing basic strategy in blackjack.
Retail Bitcoin investors don't appear to be getting those odds. ®