Retail Bitcoin (BTC) buyers may actually be losing on their investments, research from the Bank of International Settlements (BIS) states. It turns out that somewhere between 73 and 81 percent of retail holders are losing money due to Bitcoin being down 73 percent in the past year.
However, Bitcoin is also up 155 percent in the past five years. BIS conducted the research in an effort to understand why retail investors still participate in cryptocurrency exchanges despite the losses. The "Crypto trading and Bitcoin prices: evidence from a new database of retail adoption" paperwork, put together by Raphael Auer, Giulio Cornelli, Sebastian Doerr, Jon Frost, and Leonardo Gambacorta examined a database of crypto exchange apps used by retail investors daily in 95 countries between 2015 and 2022.
It turns out that when the price of Bitcoin rises, more people decide to download and use crypto exchange apps and vice versa. Furthermore, the users of such exchange apps are mainly young males, which are also the most risk-seeking segment of the population.
The main nuance of the research shows that retail investors actually fuel up the profits of larger investors, who sell their holdings as new market participants drive up the price.
“At the time of writing, 73–81 percent of users had likely lost money on their investments in cryptocurrencies," the researchers wrote.
"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 paper reads.
According to BIS, the trend would act as a scrutiny catalyst, while cryptos would be the driving force behind the “democratization” of the current financial system.
"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," the authors concluded.
Crypto-critic and software engineer Stephen Diehl echoed BIS’ statements, adding that the majority of retail BTC investors hopped on the crypto train during the COVID-19 pandemic lockdowns, and since then the market has collapsed several times, which drives such investors into the red.
The same blueprint?
It turns out that the BIS findings tightly correlate with the data about those investing in other highly speculative financial instruments. Justin Hughes, a managing member of Philadelphia Financial Management of San Francisco, tried to push the U.S. Securities and Exchange Commission (SEC) to tighten its regulations on foreign exchange trading in order to offer greater security for investors.
"[A]pproximately 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," Hughes wrote to the SEC.
To top it all off, in 2016, the UK's Financial Conduct Authority (FCA) announced that a hefty 82 percent of retail investors trading contracts for differences (CFDs) were on a loss, with Hughes comparing the outcomes with gambling, like winning on Blackjack or craps.