- Federal Reserve Bank of Cleveland research finds crypto’s volatility stems from investors holding wildly divergent beliefs about future returns, more than demographics like age or income.
- Crypto owners expected average annual returns of 22%, compared with just 7% among non-owners, despite many on both sides admitting they had little basis for their forecasts.
- A controlled experiment showed that simply revealing Bitcoin’s past 12-month performance lifted participants’ desired crypto exposure by around 47% and prompted many to actually buy in.
- Researchers warn this feedback loop, where rising prices lure new buyers who push prices higher still, means sharp volatility is likely to persist as long as investor knowledge gaps remain.
A working paper from the Federal Reserve Bank of Cleveland has offered fresh insight into why digital assets swing so much more violently than conventional markets: the people who hold them tend to hold wildly divergent expectations about where prices are headed next.
Drawing on survey responses from tens of thousands of American households, economists Michael Weber, Bernardo Candia, Olivier Coibion and Yuriy Gorodnichenko concluded that anticipated returns do more to predict who owns crypto than standard demographic markers like age, income or education. That stands in sharp contrast to traditional holdings such as equities, bonds or gold, where personal financial circumstances typically carry more weight than raw optimism about future gains.
The gap in expectations was substantial as well. Existing crypto holders projected returns averaging 22% over the coming year, against roughly 7% among those who had stayed out of the market. Owners also rated the asset class as comparatively less risky than non-owners did; even though a majority on both sides admitted they had little grounding for any forecast at all.
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Perhaps the most striking part of the study came from a controlled experiment. When participants were simply shown data on Bitcoin’s trailing 12-month performance, their stated appetite for crypto exposure jumped by around 47% relative to a control group, and many went on to actually buy in afterward. The reaction was concentrated among people who said they’d previously avoided the space mainly out of unfamiliarity. Those already convinced crypto was a poor bet largely shrugged off the new information.
As Long as Knowledge Gap Exists, Price Swings Here to Stay
That mechanism, the authors argue, may help explain how speculative rallies feed on themselves: rising prices draw in fresh buyers, whose purchases then push valuations higher still, luring in the next wave. They also found that crypto windfalls tend to get spent differently than other wealth gains – closer to how people treat a lottery payout than a lasting boost to net worth, showing up in one-off purchases rather than everyday spending habits.
The bigger takeaway, according to the researchers, is that crypto’s turbulence isn’t purely a function of market mechanics. It’s rooted in the fact that so many participants are operating with incomplete, inconsistent (and easily shifted) beliefs about what the asset is actually worth. As long as that knowledge gap persists, they suggest, sharp price swings are likely to remain a defining feature of the market, with future retail demand hinging as much on the narrative around past gains as on the gains themselves.
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