Trendspotting: In the Long Run, Investors Put Their Faith in Crypto

NewsWire: 4/26/22

• Many investors expect crypto to offer the greatest return on their investments over the next decade, according to a new survey. But less than half say that they could explain how crypto works to someone else. (Investopedia)
  
• NH: According to a recent survey, many investors are more bullish on cryptocurrency than other assets. When asked what investments they expect the greatest return on over the next ten years, Gen Zers (18-25), Millennials (26-41), and Gen Xers (42-57) all ranked crypto number one. But Boomers (58-76), ranking it fifth, retain their preference for stocks and mutual funds. 

• These results may surprise some of our readers. Cryptocurrency has not fared well in 2022. Bitcoin is down -12.99% YTD and Ethereum is down -18.41% YTD. At the same time, crypto stocks like Coinbase (COIN) and TeraWulf Inc (WULF) are down -46.38% YTD and -73.19% YTD, respectively. But as crypto fans will tell you, crypto has never been about day-to-day or even year-to-year performance. It's about the chance to own your place in a new heaven and a new earth.

• So what exactly is going on in the Investopedia survey? IMO, much can be explained by the question's wording. The surveyors did not ask: What's the best or most valuable investment? Instead, they asked: Where do you expect the greatest return?
• There's a meaningful difference between these two questions. The first prompts the respondent to think in terms of expected value. If you could, so to speak, roll the next decade a thousand times, what's the average return on the different assets. The second suggests the greatest likelihood of having the greatest ROI.
• So let's say you estimate that your boring mutual fund holdings are very likely to generate an 80% return over the next decade with a very small sigma. And let's say you reckon that crypto's expected returns are bimodal: It has a 60% likelihood of 160% and a 40% likelihood of -100%. Well, there you go. Crypto has the lowest expected value or return (in this case, 56%). But it has the highest probability of being the greatest. If crypto is only one among several different asset classes, then--given an all-or-nothing return distribution--its odds of being number one is even greater.
• Does this make a crypto investment sound like a lottery ticket? Maybe. Crypto's realized market volatility is many multiples higher than any other broad investment class. And that's basically what a lottery ticket is: a super high volatility investment. In fact, a lottery ticket has such high volatility that most purchasers don't really care what the expected value is. Even if you told them that it's negative, they still wouldn't care.
• As we wrote in an earlier NewsWire, many young people indeed see crypto as a sort of lottery ticket. This is why most of them are making relatively small investments. If it really takes off in the next few years, early retirement here I come. But if it tanks, oh well, I probably would have lost the money in the stock market anyway. (See “Who Invests in Crypto?”) As we pointed out, this attitude may reflect their poor evaluation of the returns on standard equity ETFs as much as it reflects any special faith in crypto.
• Another revealing finding of this survey: Fully 49% of investors say they have a beginner's knowledge of digital currency, and only 27% say they have an advanced knowledge. That may sound worrisome. But then again, let me repeat: How many people who buy lottery tickets fully understand the average expected return on their investment? More to the point, would it make any difference if they did?