The little fish that have been lured into the Bitcoin (BTC) market are helping the whales to cash out.
Somewhere between 73% and 81% of retail Bitcoin buyers are likely to be into the negative on their investment, based on research published on November 14 by the Bank of International Settlements (BIS).
It means that the Bitcoin they purchased is now worth less. Notably, Bitcoin is down 73% in the last year, and up 155% in the last five years. Losses are only realized after an investor sells their holdings.
The Switzerland-based bank for other central banks wanted to determine why retail investors continue to participate in crypto exchanges to trade tokens like Bitcoin. It is still a mystery, given that people do not generally use cryptos to make payments, measure value, or finance real-world investments.
BIS unveiled its findings in a working paper titled “Crypto trading and Bitcoin prices: evidence from a new database of retail adoption.”
The paper’s authors – Sebastian Doerr, Jon Frost, Raphael Auer, Giulio Cornelli, and Leonardo Gambacorta – developed a database of crypto exchange apps used mainly by retail investors daily in 95 nations between 2015 and 2022.
They discovered that when the price of Bitcoin surges, more people decide to download and use crypto exchange apps. These users, the researchers noted, are disproportionately younger and male – the most risk-seeking segment of the population. This group ends up pushing the profits of bigger investors, who sell their holdings as new market investors and traders push prices up.
The paper notes:
“[A]t the time of writing, 73–81 percent of users had likely lost money on their investments in cryptocurrencies. 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.”
The trend, according to the researchers, invites more scrutiny of claims that cryptos will ‘democratize’ the financial system. These authors concluded:
“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.”
One crypto-critic and software engineer Stephen Diehl said in a message to The Register:
“This paper seems very accurate and matches my lived experience. 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 constant with the loss rates recorded by those investing in other majorly speculative financial instruments.
In 2011, the managing member of Philadelphia Financial Management of San Francisco, Justin Hughes, encouraged the US Securities and Exchange Commission to regulate off-exchange foreign exchange trading (forex or retail FX) to protect retail investors.
“Approximately 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.”
Stronger forex regulations arrived two years later.
In 2016, the UK’s Financial Conduct Authority (FCA) stated that 82% of retail investors trading contracts for differences (CFDs) – financial contracts that pay the difference in the settlement price between closing and opening trades – lost money.
Hughes noted in his letter that speculators would get better investment results from gambling in casinos, where 56% of the players lose “come” bets in craps or 58% lose playing basic strategy in blackjack.
Sadly, retail Bitcoin investors seem not to get these odds.