Until the end of December 2018, Bitcoin was declared to be dead 338 times. Besides strong representation in media and public discussion, the cryptocurrency went through the ripple effect resulting in a peak of 19,871 $/BTC on December 17, 2017, followed by a dramatic devaluation resulting in a price of 3,896 $/BTC on December 31, 2018. The cryptocurrency is related to high volatility, strong herd behavior and bounded rationality. But to what extent does the perception of risk in investment’s context differ from Bitcoin and other investments?
In the following paper, the technical implications and a brief historical development are provided in the second chapter. In the third chapter, the mainstream literature on investment behavior, risk aversion and measuring instruments for risk aversion is reviewed. In order to approach the research question, an online-survey among students is conducted which is presented in the fourth chapter and evaluated in the fifth chapter. In the last chapter, both the research method and the results are critically reflected and an outlook on future developments is given.
Table of Contents
1 INTRODUCTION
2 BITCOIN – TECHNICAL IMPLICATIONS AND HISTORICAL DEVELOPMENT
3 THE BEHAVIOUR OF BITCOIN INVESTORS
3.1 THE REPRESENTATION OF UTILITY IN THE INDIVIDUAL’S DECISIONS
3.2 HERD BEHAVIOUR AND COLLECTIVE IRRATIONALITY
3.3 RISK AVERSION AND CHOICE’S PREFERENCES
4 EXPERIMENTAL SETUP
4.1 METHODOLOGY
4.2 HYPOTHESES
4.2 QUESTIONNAIRE DESIGN
5 EVALUATION
6 REFLECTION
Research Objectives and Core Themes
This paper investigates the extent to which risk perception in Bitcoin investments differs from traditional investment contexts. By integrating insights from behavioural economics, the study explores how psychological factors, such as herd behaviour and cognitive heuristics, influence individual decision-making processes under market volatility.
- Technical foundations and historical evolution of Bitcoin
- Behavioural patterns of investors, including utility and risk aversion
- Methodological design of an online survey to measure risk preferences
- Evaluation of investor susceptibility to framing effects and market trends
- Analysis of sentiment correlation with actual investment behaviour
Excerpt from the Book
3.2 Herd Behaviour and collective irrationality
The recent past of Bitcoin is coined by bubble formation with price increase in the fourth quarter of 2017 and the crash in January 2018. In the first month of 2018, Bitcoin investors lost $87B. As described in the previous chapter investors tend to use simple heuristics when faced with uncertainty, especially in situations of high market volatility.
Therefore, several drivers can be determined which resulted in the burst of the bubble reducing Bitcoin’s market capitalization from its peak in December 2017 of $247B down to $107B in December 2018 which is displayed in Figure 5 in the appendix. One can assume that the Representativeness Heuristic where investors don’t focus on long-term averages and focus too much on experience made from the past when they chose a prospect. Moreover, a gold rush mood among investors by focussing on past price gains led to a situation in which risks could potentially arise due to the high presence in media and society. From this point, the Availability Heuristics arise where the presence in the media and public discussion leads to a biased investment behaviour. Bitcoin's partly high price gains in 2017 resulted in a herd behaviour and general overconfidence concerning the risk of cryptocurrencies. High exit hurdles additionally reinforced the effect.
Speculative trading created a bubble that can be followed by high prices, high volatility and high trading volumes. According to TOPOL, the bubble bursts are a consequence of uncorrelated behaviour. BIKCHANDANI, HIRSHLEIFER & WELCH deepen the approach and assume that even small information can cause an information cascade being responsible for herd behaviour. This model implies that investors behave fragile, idiosyncratically and that trends can result in drastic changes in mass behaviour. For example, a piece of small information concerning Bitcoin can reduce the trust in the currency and irrationally lead to a sell-out of the cryptocurrency where investors mimic the behaviour of other investors without knowing the reason for the original behaviour.
Summary of Chapters
1 INTRODUCTION: This chapter outlines the motivation for the study, focusing on the high volatility of Bitcoin, and defines the research question regarding risk perception differences between Bitcoin and traditional assets.
2 BITCOIN – TECHNICAL IMPLICATIONS AND HISTORICAL DEVELOPMENT: Provides a technical overview of the Bitcoin network, its peer-to-peer nature, blockchain structure, and the consensus mechanism behind the cryptocurrency.
3 THE BEHAVIOUR OF BITCOIN INVESTORS: Reviews mainstream economic literature concerning utility, risk aversion, and psychological biases such as herd behaviour and bounded rationality in investment decision-making.
4 EXPERIMENTAL SETUP: Details the methodology behind the online-survey conducted at Zeppelin University, including the formulation of hypotheses and the design of the questionnaire used to capture risk preferences.
5 EVALUATION: Presents the empirical results of the survey, analyzing participant demographics, sentiment towards Bitcoin, and testing the defined hypotheses through statistical correlation.
6 REFLECTION: Critically evaluates the study's findings, discusses the limitations of the survey, and provides an outlook on the future of cryptocurrency investments and the measurement of risk aversion.
Keywords
Bitcoin, Behavioural Economics, Risk Aversion, Herd Behaviour, Cryptocurrency, Investment Decision, Market Volatility, Prospect Theory, Heuristics, Sentiment Analysis, Bounded Rationality, Information Cascade, Financial Psychology, Online Survey, Speculation
Frequently Asked Questions
What is the central focus of this research?
The research primarily investigates how the perception of risk in Bitcoin investments differs from traditional investment scenarios and how behavioural factors influence these decisions.
What are the primary themes discussed in the paper?
Key themes include the technical nature of Bitcoin, theories of investor behaviour, the impact of cognitive biases like the "Hot Hand" fallacy, and the correlation between market sentiment and investment actions.
What is the main research question?
The paper asks: "To what extent does the perception of risk from investments and Bitcoin investments differ?"
Which scientific methods are applied?
The author uses a combination of literature review on behavioural finance and a quantitative online survey conducted among students at Zeppelin University to gather empirical data.
What topics are covered in the main body?
The main body covers the technical functioning of Bitcoin, the theoretical framework of utility and risk, the experimental setup of the survey, and the statistical evaluation of the gathered responses.
Which keywords define this work?
The work is defined by terms such as Bitcoin, behavioural economics, risk aversion, herd behaviour, market volatility, and prospect theory.
How did the survey address the "Hot Hand" fallacy?
The survey presented participants with visual price charts exhibiting different trends to observe if they were susceptible to projecting past performance onto future expectations.
What role does natural language processing (NLP) play in the study?
NLP was used to analyze the free-text associations participants had with Bitcoin, allowing the author to categorize their sentiment as negative, neutral, or positive.
What conclusion does the author reach regarding the "risk" of Bitcoin?
The study concludes that participants generally perceive Bitcoin more as a speculative object than a stable investment, with fear being a predominant emotion influencing the aversion toward the currency.
Why does the author suggest repeating the study later?
The author suggests a repeat study because media coverage significantly impacts sentiment; thus, the findings are highly dependent on the "mood" of the public and the reporting at the time of the survey.
- Arbeit zitieren
- Anonym (Autor:in), 2019, To what Extent does the Perception of Risk from Investments and Bitcoin Investments Differ? Insights From a Choice Experiment, München, GRIN Verlag, https://www.grin.com/document/1034394
