Fed study: Crypto investors driven by beliefs, swayed by past Bitcoin returns

A new Federal Reserve Bank of Cleveland working paper argues that cryptocurrency investors behave differently from traditional market participants not because of who they are, but because of what they believe. The study, titled "Do You Even Crypto, Bro? Cryptocurrencies in Household Finance," finds that expectations about future crypto returns explain more variation in ownership than demographics or risk tolerance.

Researchers Michael Weber, Bernardo Candia, Olivier Coibion and Yuriy Gorodnichenko analyzed repeated surveys covering as many as 25,000 U.S. households per wave. They also ran a randomized information experiment showing that simply telling people about Bitcoin's recent performance boosted both their desired crypto allocation and actual purchases. The results suggest a feedback loop: past gains attract new buyers, whose demand pushes prices higher, which in turn pulls in even more investors. "Positive returns attract new participants, which raises the price further," the authors wrote.

The knowledge gap around crypto remains stark. In a 2021 survey wave, 87% of non-owners said they did not know what return to expect from crypto over the following year, and even among owners, 54% declined to give a forecast. Among those who did offer an estimate, the gap was enormous: crypto owners projected an average 22% return over the next year, compared with just 7% among non-owners. Owners also rated crypto as less risky than non-owners did.

The findings carry implications beyond academic curiosity. The Cleveland Fed researchers say the mechanics they identified align with classic speculative bubble dynamics, in which price momentum and shifting beliefs reinforce each other. For regulators and market observers, the study offers a data-backed explanation for crypto's persistent volatility and its tendency to draw in fresh capital during rallies, regardless of fundamentals.