Are Cryptos Different? Evidence from Retail Trading
Read the paperopens www.nber.org in a new tab
What they found
Using account-level data from eToro, a platform where the same retail investors trade stocks and crypto, the authors compared behavior across asset classes. In stocks, retail investors were contrarian (buying after price drops); in crypto, the same investors were momentum traders (buying after price rises), and they were more likely to increase positions in crypto after gains. Crypto investors showed a smaller disposition effect. The authors argue that retail investors believe crypto prices are driven by other investors' demand rather than fundamentals, so they extrapolate trends rather than fade them.
What you can use
- The same people who buy the dip in stocks chase the rally in crypto; the behavior depends on what they believe drives the asset.
- Trend-chasing by retail is a structural feature of crypto markets, which helps explain why crypto momentum is so strong.
- Understanding whether your counterparties are contrarian or momentum traders is essential in crypto.
Caveats
eToro users are a specific population (social trading, mostly European); the data covers 2015 to 2019. NBER working paper version linked; published in JFE 2024.
Tags: crypto, retail, momentum, behavioral
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.