Crypto trading and Bitcoin prices: evidence from a new database of retail adoption

November 2022 (revised July 2023)

Summary

Focus 

Cryptocurrencies are volatile assets that have gone through multiple boom-bust cycles. To date, people do not use cryptocurrencies widely to make payments, to measure value or to finance real-world investments. Yet despite this, retail investors continue entering into crypto exchanges to trade cryptocurrencies like Bitcoin. What explains this adoption?

Contribution 

We study the drivers of crypto trading app adoption using a novel database on the daily use of crypto exchange apps for 95 countries over 2015–22. We make this database available as a resource for researchers, policymakers and practitioners. We answer the following questions: do more people join crypto markets when the price of Bitcoin rises? If so, who are these new users? And what country characteristics matter more for crypto adoption?

Findings 

We show that, when the price of Bitcoin rises, more people download and actively use crypto exchange apps. These new users are disproportionately younger and male, commonly identified as the most "risk-seeking" segment of the population. We show that, due to price declines, an estimated 73-81% of retail investors have likely lost money on their initial investment. To establish a causal effect of crypto prices on adoption, we focus on two events that affected Bitcoin's price without directly impacting crypto exchange app usage: the crackdown of Chinese authorities on crypto mining in mid-2021 and the social unrest in Kazakhstan, a country where many Bitcoin miners are located, in early 2022. We find that during both events a change in the price triggers a significant change in the number of users. Overall, our results suggest that rising Bitcoin prices are what drive crypto adoption (consistent with theories of feedback trading), rather than alternative explanations.

Abstract

Prices for cryptocurrencies have undergone multiple boom-bust cycles, together with ongoing entry by retail investors. To investigate the drivers of crypto adoption, we assemble a novel database (made available with this paper) on retail use of crypto exchange apps at daily frequency for 95 countries over 2015–22. We show that a rising Bitcoin price is followed by the entry of new users. About 40% of these new users are men under 35, commonly identified as the most "risk-seeking" segment of the population. To establish a causal effect of prices on adoption, we exploit two exogenous shocks: the crackdown of Chinese authorities on crypto mining in mid2021 and the social unrest in Kazakhstan in early 2022. During both episodes price changes have a significant effect on the entry of new users. Results from a PVAR model corroborate these findings. Overall, back of the envelope calculations suggest that around three-quarters of users have lost money on their Bitcoin investments.

JEL classification: E42, E51, E58, F31, G28, L50, O32.

Keywords: Bitcoin, cryptocurrencies, cryptoassets, regulation, decentralised finance, DeFi, retail investment.