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Beneath the Crypto Currents

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Cryptocurrency markets are frequently marked by market manipulation and a stark divide between large, sophisticated investors and smaller retail traders. Julapa Jagtiani argues this disparity is particularly evident in the case of Ethereum (ETH), the second-largest cryptocurrency by volume, where the gap in success between institutional and retail investors is even more pronounced than in traditional asset markets.

Image courtesy of interviewee. September 30, 2024

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The analysis and conclusions set forth are those of the author and do not indicate concurrence by the Federal Reserve.

This video discusses the differences in trading behaviors between large and small investors in the cryptocurrency market, highlighting the challenges and opportunities presented by the current regulatory environment. It notes that cryptocurrencies are less regulated than traditional securities, allowing sophisticated investors to potentially manipulate prices. The discussion includes references to phenomena like "pump and dump" schemes, particularly affecting smaller, newer cryptocurrencies but also observed in larger ones.

This video outlines that large investors, evidenced by larger wallet sizes, tend to be more strategic and tactically adept, enabling them to capture greater returns and possibly exhibit a deeper understanding of market dynamics. Conversely, smaller retail investors often lack clear strategies, which can lead to increased volatility driven by their actions.

While cryptocurrencies were initially promoted for enhancing financial efficiency and inclusion, they have largely been utilized for speculative purposes. The discussion emphasizes that more effective regulation is necessary to protect consumers and investors, particularly given the cross-border nature of cryptocurrency transactions and the potential for regulatory arbitrage.

There are also mentions of the different characteristics of major cryptocurrencies like Bitcoin and Ethereum, where Bitcoin is often viewed as a hedge against inflation, while Ethereum serves mostly in speculative capacities. This video concludes by stressing the importance of coordinated regulatory efforts in the cryptocurrency space to ensure investor protection.

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Here are five key points from the video:

1. **Differences in Investor Behavior**: The video explores the contrasting trading behaviors of large and small investors, particularly in the cryptocurrency market, which is characterized by its lack of regulation and susceptibility to manipulation. Large investors often have a more strategic approach, while smaller investors may act impulsively.

2. **Market Manipulation Risks**: The unregulated nature of the cryptocurrency market allows sophisticated investors to potentially manipulate prices, such as through practices like "pump and dump," where the value of a cryptocurrency is artificially inflated before being sold off, leaving smaller investors to bear the losses.

3. **Volatility Driven by Retail Investors**: The volatility observed in cryptocurrency prices is primarily driven by retail investors, who tend to lack cohesive strategies and can cause erratic market behavior, in contrast to more strategic movements observed in larger investors.

4. **Use of Cryptocurrencies**: Despite the initial intent to enhance efficiency and financial inclusion through cryptocurrencies, the video notes that the primary use has shifted towards speculation and investment, rather than facilitating payments or improving payment systems.

5. **Need for Regulation**: The video emphasizes the necessity for coordinated regulatory efforts across jurisdictions to address the complexities and risks associated with cryptocurrency trading, aiming to protect consumers and investors from potential losses in an evolving and cross-border market.

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Here are some key quotes extracted from the video you , highlighting important themes and ideas related to the differences between large and small investors in the cryptocurrency market, as well as the need for regulation:

1. **Market Manipulation and Regulation:**
- "This allows for a more opportunity, uh, for sophisticated, uh, complex large investors to manipulate the market."
- "Until that is finalized in the US, uh, these activities are not regulated the way, uh, other securities are being traded."

2. **Impact on Retail Investors:**
- "The little guys who generally, uh, are the ones losing their shirts... when, uh, Tara Luna, uh, failed or FTX failed."
- "These little guys who are afraid... put their savings or their hard earned income into, uh, crypto every month, and they end up losing their... lifetime savings."

3. **Differentiation Between Cryptocurrencies:**
- "There are many different cryptocurrencies, and they're not all the same... like Bitcoin is very different."
- "But also these days, some people feel that it is, uh, a good, uh, hedge against inflation because Bitcoin is considered to be digital gold."

4. **Use Cases of Cryptocurrencies:**
- "The fundamental motivation for creating all this crypto is actually to enhance efficiency, to allow more independence."
- "It turns out that actually the most, uh, practical usage of these cryptocurrencies and not any of that... it hasn't really been used for payment to enhance, uh, efficiency."

5. **Investor Behavior and Strategies:**
- "Sophisticated investors as proxy... by their larger wallet size tend to be more tactical, more strategic in their transactions."
- "We find that the volatility is tended to be driven by retail investors as opposed to, uh, large sophisticated investors."

6. **Call for Regulatory Coordination:**
- "It is very important that regulators coordinate across, uh, jurisdictions... these activities have moved across borders."
- "It can, it can take place anywhere in the world... and it's absolutely needed to protect consumers and investors."

These quotes capture significant insights into the topic of cryptocurrency trading behaviors and the complexities involved in navigating this asset class for both large and small investors, as well as the pressing need for better regulation in the space.

X-TIMESTAMP-MAP:LOCAL=00:00:00.000,MPEGTS=900000

00:00.145 --> 00:03.925
The goal is to explore the difference between,

00:04.945 --> 00:09.845
large and small investors, in terms of

00:09.905 --> 00:12.125
how they, their trading behaviors.

00:13.085 --> 00:16.905
'cause we know that generally, and particularly this market,

00:16.905 --> 00:19.625
because it's a new asset class, right?

00:20.325 --> 00:24.585
It is, not exact, not exactly regulated

00:24.615 --> 00:27.825
because, you know, the, these cryptocurrencies, if you,

00:27.925 --> 00:31.145
if you have seen a lot of, this

00:31.825 --> 00:34.945
argument whether it is actually security or utility

00:35.205 --> 00:38.345
and which, which regulatory agency should

00:38.425 --> 00:39.545
be regulating it.

00:40.125 --> 00:43.505
And so until that is finalized in the us,

00:43.715 --> 00:48.105
these activities are not regulated the way,

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other securities are being traded.

00:50.255 --> 00:52.825
This is allows for a more opportunity,

00:53.005 --> 00:56.745
for sophisticated, complex large investors

00:57.125 --> 00:58.385
to manipulate the market.

00:59.285 --> 01:00.505
And, and so we,

01:00.565 --> 01:02.345
and this is not unusual,

01:02.565 --> 01:04.745
we have seen it in traditional asset as well.

01:05.125 --> 01:07.905
So we actually, we try to explore this,

01:08.045 --> 01:09.225
and we have heard of pump

01:09.245 --> 01:12.915
and dump, for small new,

01:13.215 --> 01:15.035
cryptocurrencies.

01:15.105 --> 01:16.875
They appear for a little bit.

01:17.015 --> 01:19.435
The, price went shot up

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and they disappear, thousands of them.

01:22.535 --> 01:26.875
Um, but interestingly, we, find some evidence of that

01:27.415 --> 01:29.755
in this large cryptocurrency as well.

01:29.895 --> 01:33.275
We assume that, having a large wallet,

01:33.645 --> 01:38.355
large crypto transactions, is a good proxy for

01:38.375 --> 01:40.235
how sophisticated they are.

01:40.935 --> 01:43.515
And, and so they may be more capable

01:43.695 --> 01:46.835
of manipulating the market and,

01:47.055 --> 01:50.595
and move, the cryptocurrency price, from

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that trading or, activities.

01:52.715 --> 01:56.995
So just dropping, crypto into, some,

01:56.995 --> 02:00.435
smaller wallets to, to drive a price up.

02:00.615 --> 02:02.195
Yes. Uh, the,

02:02.295 --> 02:06.075
and the minow are the, the little guys who generally,

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are the ones losing their shirts, from, you know,

02:09.585 --> 02:13.555
like we are, like, we have seen in many incidents that when,

02:13.655 --> 02:16.975
Tara Luna, failed

02:17.115 --> 02:20.775
or FTX failed, we can see that generally people

02:20.915 --> 02:23.055
who call for more, right?

02:23.055 --> 02:26.175
That these little guys who are afraid seeing their neighbors

02:26.725 --> 02:29.775
earning good return from cryptocurrencies

02:29.835 --> 02:33.615
and don't want to miss the opportunity and put their savings

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or their hard earned income into, crypto every month,

02:39.395 --> 02:41.855
and they end up losing their, like, some

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have lost their lifetime savings.

02:44.425 --> 02:46.375
There are many different cryptocurrencies,

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and they're not all the same,

02:48.255 --> 02:49.855
although we call them cryptocurrencies,

02:49.855 --> 02:51.695
like Bitcoin is very different.

02:51.755 --> 02:54.655
Uh, a lot of studies look at correlation between

02:55.245 --> 02:56.775
Bitcoin and other assets.

02:57.515 --> 02:58.575
Uh, and,

02:59.535 --> 03:04.185
Similarly, is, is also one of the largest,

03:04.485 --> 03:09.185
but they're different in that, so currently we,

03:09.205 --> 03:13.945
we can see that, a lot of, family wealth advisors

03:14.765 --> 03:18.945
who tend to, advise their clients who put some money,

03:19.295 --> 03:21.545
some of their savings in, crypto.

03:22.485 --> 03:26.505
And so some advice that they put in Bitcoin just

03:26.505 --> 03:28.585
because of the limited supply of Bitcoin.

03:28.765 --> 03:30.625
And, there's a small correlation

03:30.685 --> 03:33.705
or even some negative correlation between Bitcoin price

03:33.765 --> 03:35.425
and a stock index.

03:36.165 --> 03:38.865
So, that could be a hedge against the,

03:39.005 --> 03:40.225
the market movement.

03:40.325 --> 03:44.385
But also these days, some people feel that it is,

03:44.545 --> 03:46.425
a good, hedge against inflation

03:46.735 --> 03:50.745
because Bitcoin is some, considered it as being digital gold

03:51.055 --> 03:53.225
because of its, limited supply.

03:53.225 --> 03:56.585
But Ethereum is not, it doesn't have limited supply.

03:57.245 --> 03:59.025
Uh, it is also a large currency,

03:59.445 --> 04:03.995
but, also doesn't highly correlate with,

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with stock index or, interest rates

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or any other economic factors.

04:09.935 --> 04:13.515
So that could potentially be used for hedging

04:13.615 --> 04:16.075
or for speculating, mostly for speculating.

04:16.255 --> 04:19.735
The fundamental, motivation

04:19.875 --> 04:22.255
for creating all this crypto is actually

04:22.355 --> 04:26.175
to enhance efficiency, to, to allow more independence,

04:26.175 --> 04:27.495
more control for people

04:27.595 --> 04:29.895
to actually have over the financial life, right?

04:29.915 --> 04:32.535
So that we don't have to go through this,

04:32.535 --> 04:34.495
financial intermediaries, so

04:34.495 --> 04:36.215
that you can do it all directly by yourself.

04:36.215 --> 04:38.535
You have full control all over what you want to do.

04:39.195 --> 04:41.335
Uh, but, and also you can use it

04:41.335 --> 04:44.935
for making payment more efficiently and instant payment.

04:45.715 --> 04:49.295
It turns out that actually the most, practical usage

04:49.475 --> 04:50.815
of these cryptocurrencies

04:50.835 --> 04:53.975
and not any of that, it doesn't, it hasn't,

04:54.295 --> 04:57.815
expanded financial inclusion isn't, hasn't really been used

04:57.835 --> 05:00.215
for payment to enhance, efficiency

05:00.275 --> 05:01.735
or reduce friction in payment.

05:02.515 --> 05:05.455
But, they are mostly used for speculation or investment.

05:06.155 --> 05:09.295
Uh, even stable coins, which are not volatile.

05:09.875 --> 05:13.655
Uh, they have been used, mostly to support,

05:13.655 --> 05:17.095
crypto trading activities rather than making cross-border

05:17.095 --> 05:19.455
payment to enhance efficiency instantly.

05:19.615 --> 05:23.375
Billions of transactions of crypto activities,

05:23.375 --> 05:25.815
that occur on the Ethereum platform.

05:26.155 --> 05:29.975
So we look at all the wallets that are, on the Ethereum,

05:30.075 --> 05:35.055
and that is we collected data of, 127,

05:35.055 --> 05:39.535
million alts, with, each wallet has a lot

05:39.535 --> 05:42.095
of transactions, and,

05:42.155 --> 05:45.135
and so billions of transactions overall,

05:45.715 --> 05:47.735
but that is such a big data state.

05:47.835 --> 05:50.695
So we, that is, we are using that for,

05:50.895 --> 05:54.095
a separate paper that look at transactions,

05:54.405 --> 05:56.735
look at both sides of transaction with the

05:56.765 --> 06:00.285
Ethereum or, you know, whether it's exchange to,

06:00.285 --> 06:02.085
something else, other currencies

06:02.185 --> 06:04.485
or stable coins, USBT or USDC.

06:04.485 --> 06:08.965
But for this paper specifically, we, we utilize,

06:08.995 --> 06:10.725
data from coin matrix,

06:11.495 --> 06:15.125
which already has done some aggregation for us, so

06:15.125 --> 06:19.845
that we can actually look at the segment level data,

06:20.395 --> 06:22.925
look at different sizes of wallet segment,

06:23.105 --> 06:27.165
and we can see at the daily, level for on each day

06:28.035 --> 06:31.325
what, what do people do in the for, for different

06:31.945 --> 06:35.845
wallet size segment and observe their buying

06:35.905 --> 06:39.205
and selling activities of Ethereum on each day

06:40.235 --> 06:43.775
and see how it, correlated with returns

06:43.835 --> 06:46.055
and volatility of the cryptocurrencies.

06:46.625 --> 06:50.575
While we find that, sophisticated investors as proxy

06:50.675 --> 06:55.415
by their larger, the largest, wallet size

06:56.395 --> 07:00.565
tend to, be more tactic,

07:00.565 --> 07:04.725
more strategic in their transactions so that,

07:04.755 --> 07:08.125
they would end up accumulating returns from

07:08.265 --> 07:09.765
the price movement.

07:10.665 --> 07:14.295
And, the larger the wallets means,

07:15.325 --> 07:18.855
greater ability to manipulate or to take advantage.

07:19.245 --> 07:23.095
Also, maybe deeper understanding of what's going on,

07:23.475 --> 07:28.205
was able to, capture a larger portion of the,

07:28.205 --> 07:29.685
returns from this market.

07:30.625 --> 07:33.645
The little ones, the little retail investor,

07:33.785 --> 07:35.845
the smallest segment,

07:36.265 --> 07:40.565
are actually in up overall on average, losing one thing

07:40.565 --> 07:41.685
that we find interesting.

07:41.685 --> 07:43.165
This is, when we look at the

07:43.165 --> 07:44.205
returns, that's what we found.

07:44.305 --> 07:47.285
But also, interestingly, we find that

07:48.355 --> 07:51.045
when we look at volatility of the returns,

07:51.045 --> 07:55.245
because we know how volatile it is, actually, you can,

07:55.505 --> 07:58.205
wealth advisors ask people to put one, one

07:58.205 --> 08:00.125
or 2% in, in this, crypto

08:00.125 --> 08:03.965
because you have opportunity to earn 3000%,

08:03.965 --> 08:06.405
of returns in a year, for that little,

08:06.825 --> 08:08.485
but you can, that's, that's a limit

08:08.505 --> 08:09.685
to what you could lose, right?

08:09.985 --> 08:11.245
So it's very volatile

08:11.905 --> 08:16.645
and, we find that the, this volatility is tend

08:16.645 --> 08:19.765
to be driven by retail investors as opposed to,

08:20.385 --> 08:22.725
as opposed to the large sophisticated investors.

08:23.245 --> 08:27.335
'cause they kind of just, whatever going on,

08:27.335 --> 08:28.975
there's no clear strategy.

08:29.155 --> 08:32.255
And so they just kind of random and driving up the market

08:32.435 --> 08:33.815
and being manipulated.

08:34.075 --> 08:37.415
We find a clear difference between trading strategies,

08:37.735 --> 08:40.495
tactics, across different, wallet size

08:40.555 --> 08:45.255
and larger, investors tend to be, more

08:45.885 --> 08:47.655
able to capture larger returns,

08:47.795 --> 08:52.095
but that we would not be able to, actually conclude

08:52.095 --> 08:54.815
that it is a pump and dump strategy,

08:55.035 --> 08:58.125
Like in this little, crypto, currencies that,

08:58.125 --> 09:00.845
you know, just because Etherium has been around for,

09:00.845 --> 09:05.485
since 2015, it's almost a decade now, we really need to,

09:05.885 --> 09:08.005
properly regulate this, this space.

09:08.185 --> 09:12.965
It is very important that regulators coordinate across,

09:13.425 --> 09:15.365
jurisdiction,

09:15.365 --> 09:19.005
because these activities that we have seen have,

09:19.055 --> 09:20.885
moved across border, right?

09:21.075 --> 09:23.405
There's a regulatory arbitrage that,

09:23.785 --> 09:25.005
you know, things move around.

09:25.185 --> 09:27.165
And because this is on chain, it can,

09:27.425 --> 09:29.205
it can take place anywhere in the world

09:29.785 --> 09:32.045
and, difficult to regulate

09:32.185 --> 09:36.945
and it's absolutely needed to protect consumers

09:37.245 --> 09:37.865
and investors.

"Exploring the Divergent Trading Behaviors of Large vs. Small Investors in the Cryptocurrency Market"

00:00:00 - The goal is to explore the difference between, large and small investors, in terms of how they, their trading behaviors. 'cause we know that generally, and particularly this market, because it's a new asset class, right? It is, not exact, not exactly regulated because, you know, the, these cryptocurrencies, if you, if you have seen a lot of, this argument whether it is actually security or utility and which, which regulatory agency should be regulating it. And so until that is finalized in the us,
00:00:48 - other securities are being traded. This is allows for a more opportunity, for sophisticated, complex large investors to manipulate the market. And, and so we, and this is not unusual, we have seen it in traditional asset as well. So we actually, we try to explore this, and we have heard of pump and dump, for small new, cryptocurrencies. They appear for a little bit. The, price went shot up and they disappear, thousands of them. but interestingly, we, find some evidence of that
00:01:29 - We assume that, having a large wallet, large crypto transactions, is a good proxy for how sophisticated they are. And, and so they may be more capable of manipulating the market and, and move, the cryptocurrency price, from that trading or, activities. So just dropping, crypto into, some, smaller wallets to, to drive a price up. Yes. the, and the minow are the, the little guys who generally, are the ones losing their shirts, from, you know,
00:02:13 - Tara Luna, failed or FTX failed, we can see that generally people who call for more, right? That these little guys who are afraid seeing their neighbors earning good return from cryptocurrencies and don't want to miss the opportunity and put their savings or their hard earned income into, crypto every month, and they end up losing their, like, some have lost their lifetime savings. There are many different cryptocurrencies, and they're not all the same, although we call them cryptocurrencies,
00:02:51 - a lot of studies look at correlation between Bitcoin and other assets. and, Similarly, is, is also one of the largest, but they're different in that, so currently we, we can see that, a lot of, family wealth advisors who tend to, advise their clients who put some money, some of their savings in, crypto. And so some advice that they put in Bitcoin just because of the limited supply of Bitcoin. And, there's a small correlation
00:03:33 - and a stock index. So, that could be a hedge against the, the market movement. But also these days, some people feel that it is, a good, hedge against inflation because Bitcoin is some, considered it as being digital gold because of its, limited supply. But Ethereum is not, it doesn't have limited supply. it is also a large currency, but, also doesn't highly correlate with, with stock index or, interest rates or any other economic factors. So that could potentially be used for hedging

"Exploring the Usage and Impact of Cryptocurrencies: Speculation vs. Efficiency"

00:04:16 - The fundamental, motivation for creating all this crypto is actually to enhance efficiency, to, to allow more independence, more control for people to actually have over the financial life, right? So that we don't have to go through this, financial intermediaries, so that you can do it all directly by yourself. You have full control all over what you want to do. but, and also you can use it for making payment more efficiently and instant payment. It turns out that actually the most, practical usage of these cryptocurrencies and not any of that, it doesn't, it hasn't,
00:04:57 - for payment to enhance, efficiency or reduce friction in payment. But, they are mostly used for speculation or investment. even stable coins, which are not volatile. they have been used, mostly to support, crypto trading activities rather than making cross-border payment to enhance efficiency instantly. Billions of transactions of crypto activities, that occur on the Ethereum platform. So we look at all the wallets that are, on the Ethereum, and that is we collected data of, 127,
00:05:39 - of transactions, and, and so billions of transactions overall, but that is such a big data state. So we, that is, we are using that for, a separate paper that look at transactions, look at both sides of transaction with the Ethereum or, you know, whether it's exchange to, something else, other currencies or stable coins, USBT or USDC. But for this paper specifically, we, we utilize, data from coin matrix, which already has done some aggregation for us, so
00:06:20 - look at different sizes of wallet segment, and we can see at the daily, level for on each day what, what do people do in the for, for different wallet size segment and observe their buying and selling activities of Ethereum on each day and see how it, correlated with returns and volatility of the cryptocurrencies. While we find that, sophisticated investors as proxy by their larger, the largest, wallet size
00:07:00 - more strategic in their transactions so that, they would end up accumulating returns from the price movement. And, the larger the wallets means, greater ability to manipulate or to take advantage. Also, maybe deeper understanding of what's going on, was able to, capture a larger portion of the, returns from this market. The little ones, the little retail investor, the smallest segment, are actually in up overall on average, losing one thing
00:07:41 - This is, when we look at the returns, that's what we found. But also, interestingly, we find that when we look at volatility of the returns, because we know how volatile it is, actually, you can, wealth advisors ask people to put one, one or 2% in, in this, crypto because you have opportunity to earn 3000%, of returns in a year, for that little, but you can, that's, that's a limit to what you could lose, right? So it's very volatile and, we find that the, this volatility is tend to be driven by retail investors as opposed to, as opposed to the large sophisticated investors.

"Understanding Trading Strategies and Regulatory Challenges in Cryptocurrency Markets"

00:08:27 - there's no clear strategy. And so they just kind of random and driving up the market and being manipulated. We find a clear difference between trading strategies, tactics, across different, wallet size and larger, investors tend to be, more able to capture larger returns, but that we would not be able to, actually conclude that it is a pump and dump strategy, Like in this little, crypto, currencies that, you know, just because Etherium has been around for, since 2015, it's almost a decade now, we really need to,
00:09:37 - It is very important that regulators coordinate across, jurisdiction, because these activities that we have seen have, moved across border, right? There's a regulatory arbitrage that, you know, things move around. And because this is on chain, it can, it can take place anywhere in the world and, difficult to regulate and it's absolutely needed to protect consumers and investors.

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