The Bank for International Settlements (BIS) has conducted research to identify the drivers of cryptocurrency investments. Why do users choose cryptocurrency? Do they distrust banks and payment systems, or do they believe that the time of fiat currencies has passed?
The authors of the document highlight that “… understanding the concerns and sociodemographic characteristics of cryptocurrency owners is crucial to those wanting to gauge the potential of cryptocurrency markets and estimate how large this asset class could eventually become.”
The following three reasons are considered the main drivers of cryptocurrency investment:
- 1. The unwillingness to pay transaction fees to third parties.
- 2. The complete anonymity in the outside world.
- 3. The absolute transparency of transactions on the level of blockchain which ensures fraud protection.
Bitcoin founder Satoshi Nakamoto stated that the world needed an electronic payment system that would allow users to carry out transactions without the need for a third party. Vitalik Buterin, one of the creators of Ethereum, considered “non-discrimination and non-censorship” to be one of the main principles of Ethereum.
The BIS working paper is based on the “Survey of Consumer Payment Choice”. The dataset is representative of the US population and covers the period from 2014 to 2019.
After analyzing the statistics, the researchers came to an unexpected conclusion.
They state that there is no evidence that American investors turn to cryptocurrencies as an alternative to fiat currencies or regulated finance. Cryptocurrency investors show no higher concerns about the security of traditional payment systems — either cash or commercial banking services.
The research shows that cryptocurrency assets are still a niche market. The majority of crypto investors are young, educated men. The main sociodemographic characteristics of American investors are educational background and young age.
The chart shows the distribution of cryptocurrency owners according to their income and educational attainment. It is obvious that Bitcoin is the most popular cryptocurrency, which is why it may seem strange that Bitcoin owners have an income below average among all cryptocurrency investors.
In 2020, with the pandemic, there were certain changes.
The BIS working paper analyzed data up to 2019. How have these tendencies changed with the COVID-19 pandemic? The recent increase in the popularity of cryptocurrencies may have changed the investor base.
The next figure is based on data from the 2020 “Survey of Consumer Payment Choice” that has recently been published. During the pandemic, the demand for cryptos increased. According to research data, nearly 4% of Americans own at least one cryptocurrency — compared to only 1.9% in the previous year. Also, more and more people become educated about cryptocurrencies (over 72% in 2020).
Cryptocurrency investors show less difference with the average population, and cryptocurrency has become more popular among less-educated people than the year before. The average age of investors has also increased. Although there are still more young and educated men among cryptocurrency investors, the differences are becoming less and less significant. As the popularity of cryptocurrencies increases more traditional investors become interested in these assets.
It is very important to understand if the continuing growth of cryptos indicates increasing distrust in regulated financial markets and monetary systems. The research shows that this is not true.
From a policy point of view, if cryptocurrency investors have the same goals as those investing in other asset classes, the regulation should also be the same. Cryptocurrency investors do not consider cryptos as an alternative to fiat currency or regulated finance, but rather as a speculative asset. Moreover, recent data shows that cryptocurrencies are becoming mainstream, with cryptocurrency investors showing fewer differences from the general population.
The researchers believe that crypto markets need a clarifying regulatory and supervisory framework, which can be helpful for the industry in general, now that less-educated investors are getting interested in cryptocurrencies, and cryptos are used more and more often.
One of the results of this research is the idea of “embedded supervision” which can possibly be interpreted as the innovation that could wipe out the main benefits of digital currencies. It means introducing a cryptocurrency supervision framework that allows to monitor compliance by reading the market’s ledger. Everything depends on the specific wording of such requirements. There could be many subtle details that will depend on the organizations regulating such a framework.
The research authors claim that such a framework will allow the regulator to ensure that all exchanges are supported by cryptocurrency holdings in the blockchain. Therefore, cryptocurrency investors would be completely protected since data delivery would be automated and the regulator could monitor the ownership balances in the blockchain. At the same time, we could easily imagine the requirements of such organizations like the SEC.
Still, this research provides us with some interesting food for thought and once again shows that cryptocurrencies are still looking for their place in the financial world.