Are cryptocurrency traders pioneers or just risk-seekers? Evidence from brokerage accounts

TL;DR

This paper investigates whether cryptocurrency traders are motivated by diversification or risk-seeking behavior, finding that engaging in crypto correlates with increased risk-taking in stock trading, especially during low volatility periods.

Contribution

It provides empirical evidence linking cryptocurrency trading to heightened risk-seeking behavior in stock markets using individual brokerage data.

Findings

Cryptocurrency traders increase risk in stock trading when they start trading crypto.

Risk-seeking behavior in stocks is more pronounced during low crypto volatility.

Engagement in crypto correlates with higher trading intensity and leverage use.

Abstract

Are cryptocurrency traders driven by a desire to invest in a new asset class to diversify their portfolio or are they merely seeking to increase their levels of risk? To answer this question, we use individual-level brokerage data and study their behavior in stock trading around the time they engage in their first cryptocurrency trade. We find that when engaging in cryptocurrency trading investors simultaneously increase their risk-seeking behavior in stock trading as they increase their trading intensity and use of leverage. The increase in risk-seeking in stocks is particularly pronounced when volatility in cryptocurrency returns is low, suggesting that their overall behavior is driven by excitement-seeking.