Fed study explores how beliefs and rewards shape cryptocurrency behavior

New Cleveland Fed Paper: How Investor Beliefs and Historical Returns Shape Cryptocurrency Holding Behavior

The latest working paper released by the Federal Reserve Bank of Cleveland explores how investor beliefs and historical returns affect the behavior of cryptocurrency holders. Research found that optimism about Bitcoin is highly correlated with holding behavior, although in reality, the payment use of cryptocurrency is still limited. The study points out that demand is driven more by expectations than actual utility-a sign that supporters see as a sign of ripe interest, while skeptics see it as fueling speculative volatility.

What aspects of the cryptocurrency market will the Fed's research focus on?

The Cleveland Fed released Working Paper Nos. 26-16 on July 14, 2026, entitled "Do You Play Cryptocurrencies? Cryptocurrencies in Home Finance. The study used American families as samples to examine whether people's beliefs in Bitcoin are consistent with actual holding behaviors. The core of the paper revolves around two concepts: investor beliefs refer to households 'expectations of future cryptocurrency returns and risks; and returns refer to the historical price performance investors observe before making decisions, such as previous increases in Bitcoin.

The timing of the study carries weight as policymakers are still weighing the role of retail speculation in household finance. The study relies on the Nielsen Home Scan Survey conducted quarterly since 2018, with approximately 15000 to 25000 respondents per round, providing a large-scale behavioral dataset rather than just individual cases. The author also reminds that the working paper is a preliminary result and does not represent the views of the Federal Reserve system.

How beliefs and returns affect cryptocurrency investors 'decision-making

The most obvious difference in beliefs is reflected in expectations. In the third quarter of 2021, the average expectation of cryptocurrency holders for a one-year return of 22%, compared with only 7% for non-holders; holders also believe that cryptocurrencies are safer than non-holders believe.

Expected one-year Bitcoin return: 22% vs. 7%
Cleveland Fed survey data shows that cryptocurrency holders have much higher expectations for Bitcoin returns than non-holders.

This belief gap directly maps to participation in decision-making. The paper found that for every 1 percentage point increase in expected cryptocurrency returns, the probability of holding cryptocurrency increases by 0.8 percentage points, indicating that optimism is directly related to the choice of entering the market.

Not only beliefs, but historical rewards themselves change behavior. When researchers showed respondents information on Bitcoin's historical returns, subsequent cryptocurrency purchases increased by about 2.5 percentage points. This result reveals how holders react in volatile markets.

Increase in actual cryptocurrency purchases: +2.5 percentage points
The paper found that displaying Bitcoin reward information to respondents significantly improved subsequent cryptocurrency purchases.

The same intervention also changed risk appetite. Based on the benchmark control group of 4.3%, the ideal cryptocurrency asset allocation ratio increased by about 2 percentage points, or about 47%, indicating that new return data will encourage households to take more risks.

The significance of this study for cryptocurrency market observers

For readers who follow market sentiment, its value lies in institutional endorsement. Research by the Federal Reserve using household survey data provides authoritative support for a debate that is often dominated by social media influencers rather than rigorous behavioral data.

There are two interpretations of the market: bullish and bearish. A bullish view holds that recorded demand driven by beliefs suggests real retail participation; a bearish view holds that demand so susceptible to historical returns may exacerbate market volatility. Giovanni Compiani of the University of Chicago's Booth School of Business warns of risks, saying "it could fuel the bubble pattern we have previously found in cryptocurrencies."

These behavioral findings were contrasted with the adoption data. A Kansas City Fed briefing released on September 24, 2025, showed that U.S. cryptocurrency payment usage fell from nearly 3% in 2021 and 2022 to less than 2% in 2023 and 2024, while holdings fell from 12.3% in 2021 to 8.4% in 2024. This contrast confirms previous findings that cryptocurrency payments are rarely used by eurozone merchants, further reinforcing the picture that demand is driven by speculation rather than utility. [TAG

Market conditions also provide context for this debate. Bitcoin is currently trading at approximately US$77171, with a 24-hour volatility of only 0.25%, while the Fear and Greed Index is 66, in the "greedy" range, which is consistent with the optimism measured by the paper.

The limitations of the paper itself cannot be ignored. This is a preliminary working paper, and its measurements describe investigative behavior rather than predicting prices. Readers should regard it as a reference for understanding market sentiment rather than a trading signal. As in a recent Stanford study on Bitcoin's prediction market, its value lies in recording behavior rather than predicting prices.