Instant trading, driven by retail investors, seems to have gained a new lease of life since the onset of global stagnation due to the ongoing coronavirus pandemic. While topics about celebrities once dominated viral trends on social media, personal finance and investments seem to be just as popular today.
This growing interest in the financial markets from the everyday world of work has also spread to the crypto space, with digital currencies showing a strong price recovery after the crashes that marked Black Thursday ’12. March 2020 characterized.
While the appeal is obvious, some gatekeepers doubt that a new generation of retail investors is smart enough to invest in risky assets. But has managing personal finance and investing become the new fad?
KOVID-19 : Challenge and opportunity
Trading apps like Robinhood and Coinbase have recently become the most downloaded apps on the Apple App Store, surpassing popular social media services like TikTok and Instagram. Given the influence of social media on popular culture over the past decade, the investment apps that are downloaded the most may indicate a shift in interest, especially among young people.
According to a study by US investment giant Charles Schwab, 15% of current retail investors in America will have started investing by 2020. The U.S. brokerage industry is expected to have 10 million new customers by 2020, with Robinhood’s retail applications accounting for more than 60 percent of the total.
The boom in retail investment in 2020 can be attributed to two factors: Market volatility and coronavirus lock-in. When the world economy had come to a virtual standstill, governments sought to stimulate growth and recovery through massive financial injections in the form of stimulus packages.
According to a study by Charles Schwab, Millennials and Generation Z make up the majority of the new investor class that will emerge in 2020. More than half of the participants who reported entering the wealth market when the COWID-19 pandemic began are millennials. Jonathan Craig, senior executive vice president and head of investor relations at Charles Schwab, told Cointelegraph:
In the past year, we have seen significant growth and interaction among retail investors, due to lower transaction costs, new products and services that are user-friendly and accessible, and investment opportunities presented by market volatility.
Perhaps fearing inflation and demonetisation, more retail investors seem to be looking to hedge against economic uncertainty. Speaking to Cointelegraph, Jay Hao, CEO of cryptocurrency exchange giant OKEx, cited the COVID-19 pandemic as a key trigger for the current surge in retail investment, adding:
The pandemic has likely accelerated decision-making on cryptocurrencies as the Federal Reserve pumped huge amounts of money into the market last year to save the U.S. economy. […] With the growing number of platforms that offer retail investors direct access to equity investments, we are witnessing a democratization of the investment space and an increase in power in the hands of the people.
The coronavirus still has a major impact on personal finances, ranging from loss of salary to dismissal or even complete job loss. Not surprisingly, more and more people are being encouraged to create unusual sources of income outside of the traditional 9-to-5 structure.
Add cryptography to the mix
As previously reported, Robinhood accounted for more than 60% of new investors added by US brokers in 2020. With this figure, the trading platform is in a comfortable position to identify new investment trends from the past year.
According to a blog post on the company’s website in early April, the trading platform said its customers were driving the demographic shift in financial markets. In the Charles Schwab study mentioned above, the investment giant called this new class of investor the Generation of Investors or Generation I.
The average age of the General I is 35, putting Millennials and General Z back at the center of this demographic shift in investing. Many studies have also shown that this age group, as Hao says, is most interested in cryptographic variants:
Cryptocurrencies are likely to be one of the first financial instruments to catch the attention of millennials, who have the potential to further drive the market. From popular TikTok accounts to memory-based crypto marketing, these communities and their sophistication in creating actions are bringing a new scene of user behavior to algorithms.
In early April, OKEx published a joint study with blockchain analytics service Catallact that demonstrates the impact of retail interest in the crypto-currency market. According to the report, private investor activity in the bitcoin market (BTC) exceeded that of institutional players in the first quarter of 2021.
The growth of cryptocurrency trading is so great that Robinhood reported that in the first quarter of 2021 alone, 9.5 million customers traded cryptocurrencies on its platform. This figure represents a six-fold increase in the number of customers the company registered in the fourth quarter of 2020.
Other investment and payment services have also bet on the cryptocurrency card to capitalize on the current retail craze. Companies like Venmo and PayPal have abandoned their previous hostility to cryptocurrencies to adopt a more pro-digital currency stance, given the potential for huge revenue streams.
Outside the US, the resurgence of crypto trading has had a significant impact on South Korean financial markets. Companies that invest in cryptocurrency exchanges see their share prices rise massively. K Bank, the largest banker of Upbit, one of South Korea’s largest cryptocurrency exchanges, has received a dramatic reversal of fortune. The bank posted $89 million in losses in 2019, a year ahead of a possible IPO.
What about financial education?
In February, Thailand’s Finance Minister Arkkhom Termpittayapaisit complained about the rise of speculative investments in cryptocurrencies among the country’s retail sector. A government official at the time warned that this trend could have disastrous consequences for the country’s capital market.
Thailand’s finance minister is not alone in this view, as similar comments come from government officials and financial regulators around the world. In January 2021, the UK Financial Conduct Authority warned that crypto investors could lose all their money due to the high risk of the market.
In addition to volatility and other well-known anti-crypto claims, issuers of these cryptocurrency portals often point to retail investors’ perceived ignorance of the intricacies of the investment market. In fact, the Securities and Exchange Commission of Thailand faced significant resistance from the Thai cryptocurrency community when it attempted to introduce qualification requirements for investors to invest in cryptocurrencies in February.
Hong Kong is another jurisdiction trying to curb retail investor participation in cryptocurrency trading, with reports of an outright ban on the horizon. Like the Thai proposal, regulators in Hong Kong want to impose a minimum income threshold for cryptocurrency investments, which could disqualify 93% of the city’s population.
There is perhaps no better reference point to examine the financial literacy argument than the GameStop saga released earlier this year. A horde of retail investors used the power of social media to counter the short sale of GME stock.
In addition to the paternalism of regulators who saw that the stock market gatekeepers were unfairly favoring hedge funds on the losing side, small traders may also have run the naked shorts on r/Wallstreetbets. One could argue that the GameStop drama proves that financial literacy is not a problem for retailers, but rather a testament to the undemocratic nature of the old financial system.
Charles Schwab’s survey provides insight into the extent to which newcomers to financial education and advice. In its survey report, the investment firm found that approximately 94% of investors want access to more information and tools to conduct their own research.
Andrew D’Anna, senior vice president of the company’s retail division, commented on the investment mindset of first-time investors: Having taken their first steps in investing, Generation I is eager to continue learning and developing their strategies to successfully build long-term wealth.
According to D’Anna, the firm’s research proves that Generation I investors don’t always want to take short-term risks for big gains. Instead, there is a generational shift in the financial markets, led by millennials and Generation Z, who are looking for guidance and education to make informed decisions.
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