The Behavioral Biases of Cryptocurrency Retail Investors

Abstract

Following a significant increase in media attention with the exorbitant rise in Bitcoin prices in 2017, initial coin offerings (ICOs) were introduced as a new way for organizations and companies to fund their businesses, presenting retail investors with a new opportunity to invest in young projects and companies. Little is known about who these investors are, why and how they invest in ICOs, and how they evaluate their investments afterward. This chapter investigates how investment behavior and investment satisfaction are influenced by behavioral biases and personality traits of retail investors in ICOs. We analyze quantitative survey data from more than 300 retail ICO investors and argue that investors demonstrate a unique set of personality traits that are connected to several behavioral biases. Biases are found to affect investment satisfaction, with overconfidence and disposition bias surprisingly being positively associated with investment satisfaction. The insights generated in this work are then also discussed in the context of meme stocks and more recent financial developments where similar biases and personality traits might influence retail investor behavior. Our findings may help investors understand and improve their investment behavior and decisions in various asset classes and situations that are comparable to the past ICO craze.