Cryptocurrencies are known for their potential to generate exceptionally high returns, but also for their unusually high volatility. For young adults who may not have a lot of money to start with, the risk of financial loss could be significant.
Due to their unique risk-reward trade-off, cryptocurrencies seem particularly appealing to young adults, many of whom seem addicted. This is not surprising given that young people tend to be more risk averse and aggressive when making financial decisions.
Blockchain currencies, or cryptocurrencies, are a class of modern financial assets that have captured the attention of media and academics. The introduction of bitcoin was one of the most important developments in the modern monetary economy. The launch of the first bitcoin futures in 2017 paved the way for the development of cryptocurrency markets. In general, the cryptocurrency industry includes cryptocurrencies, smart contract platforms, different types of “coins” (including stablecoins and privacy coins), centralized and decentralized exchanges, exchange tokens, DeFi, derivatives and Web3. Crypto-assets have certain hedging and diversification characteristics. For example, the bullish nature of bitcoin markets in the UK, Europe, and Japan makes it easier to hedge against inflation by offering higher yields. Adding cryptocurrencies to traditional stock portfolios provides added value in the form of higher returns. Currently, an estimated 6.1% of the population owns cryptocurrencies and 19% of Brits have purchased cryptocurrencies in the past. (Source: https://www.finder.com/uk/cryptocurrency-statistics). This underlines the popularity of cryptocurrencies among UK investors.
Investments in cryptocurrencies are on the rise
As of July 2022, around 20,000 different cryptocurrencies were traded with a global market capitalization of $1 trillion (source: coinmarketcap.com). Although the market capitalization fell by almost $3 trillion during the first half of November 2021 following huge price swings in cryptocurrencies, venture capital investments in cryptocurrencies and the blockchain remain high. CB Insights statistics suggest global funding was around $6.5 billion in Q2 2022 ($5.5 billion in Q2 2021). The biggest drop is in the United States, while an upward trend can be seen in Europe. In the UK, for example, $0.4 billion has been invested in blockchain startups, a number that has increased since Q4 2021 ($0.1 billion).
The attractiveness of cryptocurrencies for young people
Data suggests that cryptocurrencies are particularly popular among young adults. According to Finder’s Cryptocurrency Adoption Index, nearly half of cryptocurrency owners worldwide fall into the 18-34 age bracket. Additionally, Pew Research shows that while income status doesn’t seem to impact cryptocurrency usage, gender does. One reason for this trend could be that young people are more willing to take financial risks; another reason could be the significantly lower cost of participating in these markets compared to traditional investment markets.
Young investors take big risks…
Despite the growing popularity of cryptocurrencies and their potential for high returns, they are now considered one of the riskiest and most speculative investments. Academic studies underline the risky nature of this investment in the context of the general market downturn caused by the Covid-19 pandemic. As stock markets showed greater potential to rebound to pre-Covid levels even in the face of stronger price shocks, cryptocurrencies not only saw a huge decline of over 50%, but also took much longer to return to levels than to return to pre-Covid levels. The results of gold-backed stablecoins, considered safer than traditional cryptocurrencies, clearly show that their volatility and associated risks remain comparable to those of Bitcoin.
Overall, the cryptocurrency asset class, with its myriad offerings, carries a high level of risk for investors in general, and an even higher risk for young, impetuous investors who may not have capital to begin with, which means they are less able to absorb price shocks. absorb.
Roman Matkovskyy is associate professor of finance, co-director of the Financial Market and Corporate Outcomes research center, director of the MSc Financial Data Intelligence, at the Rennes School of Business
Akanksha Jalan is associate professor of finance, director of the MSc in International Accounting, Management Control and Auditing, at Rennes School of Business