As someone who has been closely involved with the world of finance for many years, I find the topic of financial literacy and its role in crypto adoption particularly intriguing. Having seen the impact of financial illiteracy firsthand, I wholeheartedly agree that there is a deficit that needs addressing.
According to a report published on November 26th by PiP World, it appears that the financial understanding within the cryptocurrency community could potentially be very limited, significantly trailing behind the typical level of financial literacy found in the United States.
Lacking fundamental understanding of finance can make crypto users more prone to fear and sell off during market drops. However, if the user base has a strong financial education, it could help reduce the frequent fluctuations in the cryptocurrency market, according to some experts.
Insufficient knowledge about finance can lead people to misunderstand market cues, overrate potential gains, and underestimate dangers, as Santiago Carbo-Valverde, an economics professor at Universitat de València (Spain), explained in his research on the connection between financial literacy and cryptocurrency ownership. He spoke with CryptoMoon about this topic.
Misunderstandings like these can sometimes trigger excessive responses in cryptocurrency trading, thereby intensifying market fluctuations and potentially even aiding in the creation of crypto bubbles, according to Carbo-Valverde’s statement.
It’s worth noting that Carbo-Valverde’s study, involving 2,121 participants, uncovered a significant impact of cognitive biases, particularly overconfidence, on the ownership of cryptocurrencies. In other words, the research suggests that individuals who own cryptocurrency may often be influenced by an overestimation of their own knowledge and abilities in this area.
“Specifically, individuals whose self-perceived financial knowledge exceeds their actual financial literacy (financial literacy bias) are more likely to own cryptocurrencies.”
Not just a US problem
According to Carbo-Valverde, this trend isn’t limited to just the U.S.; instead, it seems to be a common occurrence across different parts of the world when it comes to cryptocurrencies. It appears that these patterns are more characteristic of the crypto phenomenon as a whole rather than being specific to any single jurisdiction.
As a researcher, I recently discovered an intriguing finding: A considerable proportion of Canadian Bitcoin owners, including myself, possess limited understanding about cryptocurrencies and financial matters, as suggested by a March 2024 paper published in the Journal of Financial Literacy and Wellbeing. The study relied on microdata from the Bank of Canada’s comprehensive Bitcoin survey.
The study, utilizing a survey consisting of three questions (“The Big Three”), developed by finance experts Annamaria Lusardi and Olivia Mitchell from the Wharton School, further revealed disparities in digital currency understanding between male and female Bitcoin holders. Female owners generally demonstrated less knowledge about Bitcoin compared to their male counterparts.
Others find no knowledge problem
Some individuals argue against the idea that there’s a “literacy” issue with cryptocurrency ownership, suggesting instead that owning cryptos like Bitcoin might not necessarily imply a lack of financial understanding.
According to a study carried out by the Cryptoeconomics Lab at the University of Cincinnati, it was discovered that individuals who own cryptocurrencies tend to have a higher level of financial knowledge compared to those who do not own any cryptocurrencies. This information was shared by Michael Jones, the director of the lab, during an interview with CryptoMoon.
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In a manner similar to the Canadian survey previously mentioned, this study adhered to the guidelines set forth by Lusardi and Mitchell in the creation of their financial literacy scale. The results showed that, on average, individuals who own cryptocurrency scored 4.1 (on a scale of 5), compared to an average score of 3.7 for those who do not own cryptocurrency, as reported by Jones, an assistant professor of economics at the University of Cincinnati.
Jones also doesn’t see anything questionable regarding these findings. They are logical since individuals who own cryptocurrencies often wish to understand the conventional financial market better. For instance, a cryptocurrency owner studying DeFi yields may want to delve deeper into interest rates and monetary policy in general, according to Jones, who further stated:
“I would argue that cryptocurrency adoption can be an effective vehicle for increasing financial literacy.”
Different methodologies may skew results
How does one square Jones’ findings with the PiP World report cited above?
“This discrepancy likely arises from differences in methodology and sample representation,” PiP World CEO Saad Naja told CryptoMoon. The University of Cincinnati study appears to focus on direct comparisons between crypto and non-crypto owners, likely measuring financial literacy broadly, he added.
PiP conducted an in-depth analysis of the digital currency community, dividing it based on actions, opinions, and personal characteristics. As Naja pointed out, having a strong understanding of blockchain technology doesn’t necessarily mean someone is financially knowledgeable.
“Many users are highly knowledgeable about crypto protocols yet struggle with fundamental concepts like diversification, risk management and long-term financial planning.”
Naja reported that a notable discovery was the significant variation in financial literacy among various types of individuals within the cryptocurrency community.
For example, personas like the “hodler” or “Whale” demonstrated relatively high financial literacy rates compared to personas such as “The Pump and Dumper” or “The Day Trader.”
Naja pointed out that this difference underscores the fact that our community is not a uniform group, with substantial disparities in grasping fundamental financial concepts. Furthermore, he suggested that merely being interested in technology doesn’t automatically lead to prudent financial choices.
Could an investment-savvy user base tame volatility?
It’s been proposed that if users become more knowledgeable about financial matters, they may help stabilize the volatile price fluctuations that are common in the cryptocurrency market, a problem that has plagued it since its beginning.
Inexperienced traders in the retail sector are often prone to experiencing panic during financial declines, as stated by Kadan Stadelmann, the chief technology officer of Komodo, or they may become victims of manipulative strategies like pump-and-dump schemes, which can exacerbate market instability.
As an analyst, I’d rephrase it like this: “I, as an analyst, believe that having a deep understanding of Bitcoin’s long-term economic foundations motivates retail investors to keep their crypto holdings during market downturns. This steadfastness in the face of price drops, in my opinion, can fortify the market’s resilience against substantial price volatility.
It’s possible that these results might not hold significant weight because a substantial number of future crypto investors could gain access through financial advisors and investment tools such as Exchange-Traded Funds (ETFs). These funds are typically managed by Traditional Finance (TradFi) giants like BlackRock and Fidelity, providing an extra shield for newcomers, as they might offer additional security.
According to Stadelmann, while using financial advisors and Exchange-Traded Funds (ETFs) can make investing in cryptocurrencies less complex, it’s still crucial not to overlook the significance of financial knowledge.
“Furthermore, crypto’s ethos emphasizes decentralization and personal control, which requires a baseline of knowledge. For those actively engaging in DeFi or trading, financial literacy is essential.”
According to Stadelmann, while advisors and ETFs can make markets more accessible, a broader education is crucial for ensuring long-term market stability and promoting responsible adoption in the long run.
Does social media heighten risks?
Some suggest that social media may amplify the risks inherent in financial illiteracy.
The October analysis conducted by IOSCO (International Organization of Securities Commissions) on cryptocurrencies revealed a trend where potential crypto asset investors tend to frequent social media platforms. However, it’s important to remember that these platforms might not always be the most reliable sources for investment guidance. This survey, as mentioned in the report, also highlighted results from an Italian poll, stating:
“Those who rely more on social media for investment information, being less financially and digitally literate and/or more financially fragile, may be more likely to be exposed to the risk of making investment decisions of which they are not fully aware.”
Carbo-Valverde expressed worry about people relying too heavily on social media for investment advice, especially among those who are financially inexperienced. He pointed out that social media can spread false information, encourage following the crowd, and heighten feelings like overconfidence and the fear of missing out.
According to Berguist, unscrupulous individuals exploit people via deceptive tactics such as false endorsements from celebrities, phishing scams, fabricated websites, and various forms of deceitful practices on social media platforms for nefarious purposes like stealing personal data. To safeguard oneself against these threats, a greater understanding and discernment regarding investments would be beneficial.
Carbo-Valverde suggested that if most users had good understanding about money matters, the potential dangers related to social media usage would decrease substantially.
Couldn’t it be beneficial if government intervention were considered? Perhaps they could establish rules and guidelines for this situation, ensuring there is clarity and structure?
Stadelmann stated that clear rules governing cryptocurrencies and blockchain could streamline complicated ideas and boost public confidence in these sectors, thereby increasing financial literacy. However, he added that regulations by themselves might not guarantee a broad comprehension of such topics.
Examine the U.S. stock markets, which have been under strict regulation for quite some time now. However, there are still many people who do not fully understand how these markets operate, even with crucial aspects such as market orders, dividends, and portfolio diversification remaining elusive to them, Stadelmann pointed out.
A need to ‘prioritize’ education
If you acknowledge that there’s a lack of financial education, particularly in understanding cryptocurrencies, what might be the solution? According to Bergquist, for the industry to achieve widespread acceptance, it should prioritize streamlining user experiences, making onboarding easier, and educating individual investors about digital currencies and their operation.
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Naja suggests that the most effective approach in the crypto world could be emphasizing user-friendly and captivating financial learning,” he stated. This could potentially involve incorporating educational materials within sign-up procedures, digital wallets, trading platforms, and more.
Naja mentioned that tools such as interactive learning environments, short educational modules, or built-in assessment tools could assist in filling the information void,
As a researcher, I firmly believe that it’s crucial for our sector to emphasize “continuous learning” for both novice and seasoned investors, ensuring they grasp the essentials, potential pitfalls, and prospects. This was a point made by Stadelmann.
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2024-12-09 17:08