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The adoption of cryptocurrencies, such as Bitcoin (BTC), Ethereum (ETH), Cardano (ADA), and Solana (SOL), has increased dramatically in recent years as retail investors from all walks of life companies have started trading and investing in digital assets.
One of the main challenges of the widespread adoption of cryptocurrencies is how to best manage risk, not only to invest in crypto, but also to store, move and use digital currencies, a problem perpetuated by the increase in the number of inexperienced retail investors diving into this asset. classify.
In a new study, Svetlana Abramova and her colleagues set out to advance this problem. Based on an analysis of data from 395 crypto-asset users, the team designed a new typology of users that can help inform future crypto-asset solutions and accelerate widespread adoption of this new class. of assets.
The problem of cryptographic security
Cryptocurrencies are digital currencies secured by cryptography. To understand cryptography, imagine sending an impenetrable shrine full of diamonds to your friend in another country. To ensure a safe arrival, you secure it with a private lock that no one can tamper with. When your friend receives the shrine, she cannot access the diamonds because she does not have your private key. However, she can add her own private lock to the shrine and send it back to you. Once you’ve confirmed that the added lock belongs to your friend, you can remove your own lock and return the shrine to your friend, who can now access the diamonds. This is how the cryptography that secures crypto-assets works.
Most cryptocurrencies (eg, Bitcoin, Ethereum, and Solana) operate on decentralized networks that rely on blockchain technology. A blockchain is a distributed ledger that continuously records all crypto transactions. A network of computers validates cryptographic transactions, which are then added in blocks to the general ledger. Due to the decentralized nature of blockchains, no central authority can interfere or manipulate the asset.
While users of cryptoassets can leave their coins and tokens on central cryptocurrency exchanges, the risks of hacking on these exchanges are a strong incentive for users to keep their assets in a wallet. Cloud-based wallets are popular choices but are at least as vulnerable to hacks as exchanges.
A more secure option is cold storage, which is essentially a flash drive accessible only with a private key. Regardless of the choice of wallet, if a cryptoasset user loses their private key, their stored cryptocurrency is permanently lost. Indeed, four million Bitcoin, worth tens of billions of dollars, is lost forever due to lost or forgotten keys.
Sending crypto assets to and from exchanges poses additional risks, as even a minor typo in the address can result in permanent loss of the crypto asset. The way portfolios and exchanges are designed can help prevent such irreversible losses.
Growing interest in digital currencies from central banks only exacerbates security concerns with cryptocurrencies. Investors in central cryptocurrencies who don’t trust banks to manage their keys will also be prone to errors, which could cost banks a fortune in insurance.
Three clusters of data-driven crypto-asset users
To better understand the psychology of crypto investors, Abramova et al (2021) analyzed data collected from 395 users of crypto assets on five psychometric scales:
Perceived severity (eg, “The loss of crypto assets would likely cause me significant stress.”) Perceived vulnerability (eg, “My crypto wallet is at risk of being compromised.”) Perceived self-efficacy (eg, “I am able to protect my private key from being stolen. ”) Cost of response (eg,“ Spending crypto assets from secure crypto wallets is costly. ”) Perceived concern (eg,“ I am concerned about trade security vulnerabilities. “)
In addition to the scale items, the survey documents included questions on ownership, storage, other risk factors, security practices used, and demographics.
The team found that participants’ responses to perceived vulnerability and perceived self-efficacy fell into three groups (blue, orange, and green).
Blue users perceived their vulnerability to security threats to be quite low and had complete confidence in their ability to protect keys and wallets themselves.
Although orange users scored lower than blue users on perceived self-efficacy, they had a fairly high confidence in their ability to self-protect, but they were much more concerned with safety and tended to be over-the-top. greater caution regarding their crypto assets.
Green users stood out in terms of significantly lower perceived self-efficacy. They were much less confident in their ability to protect their wallets and keys.
Source: Burtverdea et al / used with permission
Cypherpunks, Hodlers and Rookies
Abramova et al (2021) then analyzed the self-reported data and chose to label the three groups Cypherpunks (blue), Hodlers (orange) and Rookies (green). Self-reported data revealed that the Cypherpunks were the early adopters of crypto (prior to 2017).
Cypherpunks entered the crypto space, not to generate wealth, as many had no income or assets to speak of at the time, but because they had become obsessed with crypto out of technological interest or out of ideological conviction. Thirteen percent got involved before 2014, when Bitcoin cost less than $ 13.
Although the Cypherpunks were the first to buy cryptocurrencies when the highest price of Bitcoin was $ 770 (before 2017), only 14.5% reported holding more than $ 100,000 in cryptocurrency and 17% preferred not to disclose the size of their holdings compared to 2% in the other clusters. Most Cypherpunks invest exclusively in cryptoassets.
Recruits have recently entered the crypto space from FOMO (fear of running out). They were primarily driven by the 3X average annual gain of Bitcoin or the 10X or greater annual gain of altcoins with smaller market caps. While only 12% of Cypherpunks were male, 33% of Rookies were female. The recruits also included a significantly higher number of older users of crypto assets (25%).
Most of the Hodlers said they were middle-aged and entered the crypto space during the all-time high of 2017, driven by the big gains. Unlike Cypherpunks, Hodlers also tend to invest in the traditional stock market. Twenty-five percent of Hodlers said they own more than $ 100,000 in cryptoassets.
Taken together, the results reveal key differences between three groups of cryptoassets users that can help inform the design of future cryptoassets solutions.
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