Investors who trade cryptocurrency also tend to take bigger risks in the stock market, suggesting they are seeking dopamine more than diversification, according to a recent study.
The paper, titled "Are Cryptocurrency Traders Pioneers Or Just Risk-Seekers? Evidence From Brokerage Accounts," appeared in the September issue of Economic Letters, stating that cryptocurrency traders' behavior is "driven by excitement-seeking."
"We find that when engaging in cryptocurrency trading investors simultaneously increase their risk-seeking behavior in stock trading as they increase their trading intensity and use of leverage," the paper says.
Researchers Matthias Pelster from the University of Paderborn, Bastian Breitmayer of Queensland University of Technology and Bond University's Tim Hasso used individual-level brokerage data to assess the impact of cryptocurrency trading on investor behavior in the stock markets.
The sample period was from Jan. 1, 2014, to Dec. 31, 2017, consisting of 668,067 individual investors.
The study found that on average, traders execute 16.8 additional stock trades and increase their use of leverage by 13.4 percent within the first 10 days after initiating their cryptocurrency activities.
Notably, traders in the age group of 35 to 44 years old increased their leverage the most, followed by 25- to 34-year-old traders.
The pattern of behavior could be associated with the fact that cryptocurrencies are far more volatile and unpredictable than stocks.
For instance, bitcoin, the top cryptocurrency by market value, often moves by more than $1,000 in a matter of just a few minutes. That sudden price volatility is rarely seen in the equity markets.
Also, as the U.S. Securities Exchange and Commission (SEC) stated last week in rejecting a proposed bitcoin exchange-traded fund, the bitcoin market is prone to market manipulation. So, the uncertainty element is high in cryptocurrencies as compared to stocks.
Hence, it's not surprising that stock traders are more likely to take more risks in equities after dabbling with cryptocurrencies.
The researchers also observed that the increase in risk-seeking in stocks is particularly pronounced when volatility in cryptocurrency returns is low.
That conclusion undercuts the popular narrative that bitcoin is a new safe-haven asset.
After all, if traders viewed cryptocurrencies as a long-term investment avenue or a safe haven asset, then their stock trading behavior should have remained unchanged.
Disclosure: The author holds no cryptocurrency assets at the time of writing.
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