International research: The financial literacy of the cryptocurrency community is terrifyingly low.
According to Cointelegraph, a recent research report released by the cryptocurrency gaming startup PiP World indicates that the financial literacy of the cryptocurrency community may be at a 'terrifyingly low' level, far below that of the average American.
PiP World stated that if investors lack basic financial literacy, they are more likely to panic during market downturns, while the opposite can help reduce the volatility of cryptocurrency.
The report states:
"A lack of financial literacy can distort expectations and biases, leading individuals to misinterpret market signals, overestimate returns, and underestimate risks."
Santiago Carbo-Valverde, an economics professor at the University of Valencia in Spain, stated that this misconception may lead traders to overreact, thereby amplifying market volatility, and could potentially lead to the formation of bubbles in the cryptocurrency market.
Valverde published a paper in 2023 (on cryptocurrency ownership and perceived financial literacy bias), finding that individuals with excessive financial confidence—meaning their self-assessed financial literacy exceeds their actual financial literacy (financial literacy bias)—are more likely to hold cryptocurrency.
What is financial literacy: According to the Taiwan Banking Association, financial literacy refers to the awareness, knowledge, skills, attitudes, and behaviors needed to make informed financial decisions. Strengthening financial literacy helps people understand and effectively utilize various financial skills, guiding how to plan money and finances.
The low financial literacy in the cryptocurrency community is a global issue.
Valverde stated that the trend of cryptocurrency enthusiasts lacking financial literacy is not unique to the United States, as similar patterns have been observed in various regions.
According to a paper published in March this year in the Journal of Financial Literacy and Well-Being, researchers used microdata from the Bank of Canada's comprehensive Bitcoin survey, concluding that most Canadian Bitcoin holders have low cryptocurrency knowledge and financial literacy.
Additionally, according to a chart provided by PiP World, the overall financial literacy level of the cryptocurrency community in 2024 is slightly lower than the average level of adults in mainland China and much lower than that of Americans.
Source: PiP World. A comparison of the 2024 financial literacy levels of adults in the cryptocurrency sector and regional financial literacy levels.
Bloodthirsty investors and day traders have lower financial literacy than Hodlers and whales.
However, the research by Michael Jones, an assistant professor at the University of Cincinnati, has different conclusions.
Jones stated that the average financial literacy score of cryptocurrency holders is 4.1 (out of 5), while the average score for non-cryptocurrency holders is 3.7. He believes this result is reasonable, as cryptocurrency holders often want to understand the traditional financial industry better.
He cited an example: if a cryptocurrency holder is trying to understand the returns of DeFi, they might want to learn more about Federal Reserve interest rates and monetary policy, and the adoption of cryptocurrency could be an effective channel for enhancing financial literacy.
However, Saad Naja, CEO of PiP World, stated that the differences in the two studies may relate to methodology and sample representativeness. PiP World's research delves deeper into the cryptocurrency community and segments it into different behaviors, emotions, and roles.
Naja stated:
"We found that familiarity with blockchain technology is not necessarily related to financial literacy. Many cryptocurrency enthusiasts have a high understanding of cryptocurrency protocols but struggle with fundamental concepts such as diversified investment, risk management, and long-term financial planning."
There are significant differences in financial literacy levels among different roles within the cryptocurrency community. For example, those categorized as 'Hodlers' or 'Whales' have relatively higher financial literacy, while bloodthirsty investors pursuing massive gains and losses, such as 'Pump and Dumpers' or 'Day Traders', have lower financial literacy.
This difference highlights that the cryptocurrency community is not homogeneous, with significant disparities in financial literacy levels among different groups. Another conclusion is that enthusiasm for blockchain technology does not necessarily translate into good financial decision-making.
Source: PiP World. The differences in financial literacy rates after segmenting the cryptocurrency community show that whales rank highest and day traders rank lowest.
Relying on the community for information may increase the risk of irrational investments.
Cryptocurrency enthusiasts tend to receive investment information through social media, but some experts say that communities may amplify the risks associated with a lack of financial literacy.
The International Organization of Securities Commissions (IOSCO) reported this year that many potential cryptocurrency investors are on social media, but this is not the best source of investment information.
The report cites a conclusion from an Italian survey:
"Individuals who rely more on the community for investment information, due to their own lower financial and digital literacy and/or more vulnerable financial situations, may be more likely to make investment decisions they are not fully aware of."
Professor Valverde stated that this is indeed a significant problem, especially among investors lacking financial literacy. Communities often amplify misinformation, fostering herd behavior, and exacerbating cognitive biases such as overconfidence and FOMO.
Coinme CEO Neil Bergquist also pointed out that scammers exploit social media to defraud individuals through fake celebrity endorsements, phishing schemes, and fake websites to steal personal information. Therefore, having more knowledge and critical thinking skills may be crucial for investors.
Source: RTT News. FOMO (Fear of Missing Out) may lead cryptocurrency investors to make erroneous decisions.
Can professional advisors and ETFs help improve literacy?
Some believe that with the entry of investment tools like financial advisors and ETFs into the cryptocurrency market, future cryptocurrency investors may be protected right from the start.
However, Kadan Stadelmann, CTO of Komodo, believes that even with institutional financial tools, the importance of financial literacy cannot be overlooked.
Additionally, the concept of cryptocurrency emphasizes decentralization and personal asset control, which requires a certain level of foundational knowledge to understand. This is especially important for those who wish to actively participate in DeFi and trading.
To improve the financial literacy of cryptocurrency enthusiasts, priority should be given to education.
Stadelmann stated that advisors and ETFs may lower the barriers to entering the cryptocurrency space, but broader education can ensure long-term market stability and responsible adoption.
If the cryptocurrency industry wants to mainstream, it must focus on simplifying user experience, guiding, and educating retail investors to understand cryptocurrencies and how they operate.
Naja also suggested:
"The cryptocurrency industry should prioritize providing easily understandable and engaging financial education, such as integrating educational resources into account opening processes, wallet apps, exchanges, and launching gamified learning platforms and simple courses, even built-in risk calculators, which can help bridge the knowledge gap."
[Disclaimer] The market has risks; invest with caution. This article does not constitute investment advice, and the opinions of analysts are for reference only. Users should consider whether any opinions, viewpoints, or conclusions in this article align with their specific circumstances. Invest at your own risk.
'Breaking down the walls! Research: Cryptocurrency traders have terrifyingly low financial literacy and frequently experience FOMO and FUD.' This article was first published in 'Crypto City.'