Cryptocurrency traders take bigger risks than stock investors

By Francis Jay

They use more leverage and take more chances in other trading, new study finds

Cryptocurrency traders are more likely to take bigger risks than investors who trade on more established markets, according to a recent report.

The study, “Are Cryptocurrency Traders Pioneers or Just Risk-Seekers? Evidence From Brokerage Accounts,” appeared in Economic Letters. It concluded 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 beginning to trade cryptocurrencies.

“We find that when engaging in cryptocurrency trading investors simultaneously increase their risk-seeking behaviour in stock trading as they increase their trading intensity and use of leverage,” the paper says.

The nature of cryptocurrencies arguably attracts more adventurous individuals. Bitcoin, Ethereum and other cryptos are far more volatile than traditional stocks and their value can often rise or drop significantly in minutes — something rarely seen in equity markets

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The researchers also noted that increased in risk-seeking in stocks is especially pronounced when volatility in crypto returns is low.

The researchers, Matthias Pelster, from the University of Paderborn in Germany, Bastian Breitmayer, of Queensland University of Technology, and Tim Hasso, of Bond University, Queensland, used individual-level brokerage data to assess the impact of cryptocurrency trading on investor behaviour in the stock markets. The sample period was from January 1, 2014, to December 31, 2017, and comprised 668,067 investors.

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