Behavioral Economics and Crypto – A List of Questions

11:38:00 AM


 2021 was a bumper year for cryptocurrency. Coins, smart contracts and everything in-between benefited from a lot of attention as voices like Elon Musk, Jack Dorsey and others leant their support. The last few years have been an indication that crypto may become a regular part of the average person’s life, not just Wall Street Bets bros*

As behavioral economists, the rise of a potentially mainstream new asset-class raises opportunities for research and better understanding how financial decision-making is influenced by crypto. These are my thoughts on interesting research areas for the field that would attempt to answer this question. 
 
1. Mental accounting and cryptocurrency: Anyone who holds coins across wallets, cold storage and on exchanges could find it difficult to keep track of the coins relative to their broader financial portfolio. Holding crypto by default has partitioning (read more on partitioning here) and mental accounting (read more here) built-in. However, how might mental accounting across multiple coins within an asset class affect people’s broader view of their finances, willingness to take risks, and likelihood of over or under reacting to market volatility? Even simpler, how might this partitioning increase the chances of people forgetting to include their cypto when tracking net-worth or making broad portfolio decisions?

2. Risk preferences and cryptocurrency: Crypto anecdotally seems to attract a younger, more risk-tolerant crowd. However, with larger firms and mainstream influencers discussing cryptocurrency, there’s a few fundamental questions around how risk preferences may shape likelihood to hold cryptocurrency. Dave Ramsey for example, seems to strongly oppose crypto, likening it to gambling (link), while Tom Bilyeau on the other hand is all for it (link). How are risk preferences influencing who buys cryptocurrency, what they buy and if they actively trade or hold for the long-term? Do these trends follow broader market trends and previous findings around the interplay between risk preferences and market behavior (read more

3. Decreased fungibility, increased spend: Fiat money is fungible. A dollar is a dollar is a dollar. However, 1 BTC is not the same as 1 ETH or 1 SOL. Not only is there no fungibility, there are silos between where these coins, smart contracts can be used. In general, when we spend $1 we understand, roughly, how much value we’ll get in exchange for that dollar. In instances wherein we’re spending ETH or BTC, are there increased chances of spending more money because it’s harder to understand the value of the coin? And does this likelihood increase exponentially with the rise of streaming where money can be spent and earned in micro-increments?

4. Time Horizons: Taking a cue from this Bankless article (link) on the difference between “tourists” and “natives” in the world of crypto, is there a difference in holding patterns, assets invested, etc., depending on individuals intended time-horizon?

5. Who gets left out: Crypto is an incredibly social world. From insider terms (WAGMI, DYOR) to Twitter wars between platforms, and parties with whales at Art Basel. While offering community to some, Crypto—like much of the financial world—can also feel exclusionary (what even is a WAGMI) to many others. This, to my mind, becomes a critical part of the research—who feels comfortable in this world of Web3, DeFi, Smart Contracts, Layer 3, staking, rugging, etc., and who feels like they’re staring at a wall of gobbledygook wondering if this is a tulip craze that will eventually come crashing down. 

If you’re reading this and have conducted research or know someone who has done research on any of these topics, drop a note in the comments!

*(yes, I know wsb is for stonks, but let the analogy live, please)

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