Retail-led momentum trading appears to have taken on a new life since the outbreak of the global stalemate caused by the ongoing coronavirus pandemic. Where celebrity challenges used to dominate viral trends on social media, topics related to personal finance and investing seem to be just as popular these days.
This growing interest of everyday people in the financial markets has spread to the crypto space as digital currencies saw strong price rallies following the slumps that marked the Black Thursday crash of March 12, 2020.
While the interest is palpable, some gatekeepers are wondering whether the new generation of retail investors have sufficient knowledge to invest in risky assets. But has personal finance and investment management become a new fashion trend?
COVID-19: Challenge and Opportunity
Trading apps like Robinhood and Coinbase were the most downloaded on Apple’s App Store recently, ahead of popular social media outlets like TikTok and Instagram. Given the impact social media has had on popular culture over the past decade, investment apps with the most downloads could indicate a surge in interest, especially among the younger population.
According to a survey by US investment giant Charles Schwab, 15% of current retail investors in America started investing in 2020. In fact, the U.S. brokerage industry gained an estimated 10 million new customers in 2020 with the Robinhood retail app, making up over 60% of the total.
The retail investment boom in 2020 can be attributed to two factors: market volatility and coronavirus lockdowns. With the world economy virtually stalled, governments sought to stimulate growth and recovery through substantial infusions of money in the form of stimulus packages.
According to Charles Schwab’s survey, Millennials and Generation Z make up the majority of the newbie investor class founded in 2020. In fact, millennials made up more than half of the participants who said they entered the asset market at the start of the COVID-19 pandemic. Jonathan Craig, Senior Executive Vice President and Head of Investor Services at Charles Schwab, told Cointelegraph:
“We have seen tremendous growth and engagement from individual investors over the past year, driven by lower trading costs, new products and services aimed at simpler and easier access, and the investment opportunities that arise from market volatility.”
Perhaps out of fear of inflation and monetary devaluation, more private investors seem to be interested in securing suitable protection against economic uncertainties. Speaking to Cointelegraph, Jay Hao, CEO of crypto exchange giant OKEx, identified the COVID-19 pandemic as a significant trigger for the current surge in retail investment, adding:
“The pandemic has likely accelerated the adoption of crypto as the Federal Reserve poured massive amounts of money into the market over the past year to save the US economy. […] With more platforms that have given private investors direct access to equity investments, we see a democratization of the investment space and more power in the hands of the people. “
The coronavirus continues to have a significant impact on personal finances, from wage cuts to vacation days and direct job losses. So it may not come as a surprise that more people are being incentivized to build emergency sources of income outside of the traditional 9-to-5 structure.
Throw crypto into the mix
As mentioned earlier, Robinhood accounted for over 60% of the new investors added by US brokers in 2020. This number puts the retail platform in a convenient position to determine development trends for newbies over the past year.
According to a blog post on the company’s website in early April, the trading platform stated that its clients are leading the vanguard of demographic change in financial markets. In Charles Schwab’s survey mentioned above, the investment giant called this new class of investors “Generation Investor” or Gen I.
Gen I has an average age of 35, which puts Millennials and Gen Z at the heart of this investment demographic again. Numerous surveys have also shown that this age group is most interested in cryptocurrencies, as Hao put it:
“Cryptocurrency is likely one of the first financial instruments to grab the attention of millennials who are able to keep the market going. From popular TikTok accounts to memetic crypto marketing, these communities and their sophistication in creating promotions bring altcoins a new scene of user behavior. “
In early April, Crypto Exchange OKEx published a joint research study with the blockchain analytics service Catallact, which highlighted the effects of retail interest in the crypto market. According to the report, retail activity in the Bitcoin (BTC) market outperformed that of institutional players in the first quarter of 2021.
Robinhood has reported that 9.5 million customers traded crypto on its platform in the first quarter of 2021 alone. That number equates to quadrupling the number of customers the company registered in the fourth quarter of 2020.
Other investment and payment services have also begun integrating crypto customers to capitalize on the current retail hype. Companies like Venmo and PayPal have ditched previous anti-crypto positions in order to develop friendlier dispositions for digital currencies given the potential for massive revenue streams.
Outside the US, a resurgence in retail crypto trading has had a significant impact on South Korean financial markets. Companies that invest in cryptocurrency exchanges are seeing massive stock price growth. K Bank, the main banker of Upbit – one of the largest crypto exchanges in South Korea – has seen a sharp reversal in wealth. The bank has bounced back from 2019 losses of $ 89 million within a year of a possible public listing.
What about financial literacy?
In February, Thailand’s Finance Minister Arkhom Termpittayapaisith lamented the surge in speculative crypto investments among retailers in the country. At the time, the government official warned that the trend could have a serious impact on the country’s capital market.
The Thai finance minister is not the only one advocating such sentiments, as government officials and financial regulators around the world have made similar statements. In January 2021, the UK’s Financial Conduct Authority warned that crypto investors could lose all of their money due to the high market risk.
Volatility and other well-worn anti-crypto rhetoric aside, issuers of these cryptocurrency crash omens often point to the perceived ignorance of retail investors about the intricacies of the investment market. In fact, the Thai Securities and Exchange Commission was heavily criticized by the Thai crypto community when it tried to introduce cryptocurrency investor qualification requirements back in February.
Hong Kong is also another jurisdiction seeking to limit retail participation in crypto trading amid reports of a blanket ban. Like the Thai proposal, Hong Kong regulators are trying to set a minimum income threshold for cryptocurrency investments that could disqualify up to 93% of the city’s population.
There may be no better benchmark for testing financial literacy arguments than the GameStop saga earlier this year. A horde of retail investors harnessed the power of social media engagement to counter GME stock short selling.
Aside from regulatory tutelage, where stock market gatekeepers wrongly favored hedge funds on the losing side, retailers on r / Wallstreetbets have likely knocked the bare shorters to the ground. It could be argued that the GameStop drama proved that financial literacy is not the problem for retailers, but rather the undemocratised nature of the old financial system.
The Charles Schwab survey provides insight into the extent to which newbies are engaging in financial education and counseling. In its published report on the survey, the investment firm found that approximately 94% of investors are interested in accessing more information and tools to conduct their own research.
Commenting on the investment mindset of newbies, Andrew D’Anna, senior vice president of the company’s Retail Customer Experience Division, said, “Now that they have invested their toes, Gen I is eager to learn and develop these strategies to successfully build prosperity in the long term. “
According to D’Anna, the company’s survey provides evidence that Generation I investors are not just about taking short-term risks in order to make huge profits. Instead, the emerging generation shift in financial markets, led by Millennials and Gen Z, is interested in receiving guidance and education to make informed decisions.