Why crypto needs to fix its ‘dangerously low’ knowledge gap

A report released Nov. 26 by PiP World suggested that the crypto community’s financial literacy rate may be “dangerously low,” lagging well behind the financial literacy average in the United States. 

Without basic financial knowledge, crypto users may be more likely to panic during a market downturn. Conversely, a financially literate investor base would help tamp down crypto’s chronic volatility, observers say.

“A lack of financial literacy can distort expectations and biases, causing individuals to misinterpret market signals, overestimate returns, and underestimate risks,” Santiago Carbo-Valverde, a professor of economics at the Universitat de València (Spain), who has studied the relationship between financial literacy and cryptocurrency ownership, told Cointelegraph.

These sorts of misperceptions can lead to overreactions when trading crypto assets, ultimately amplifying market volatility and “may also contribute to the formation of crypto bubbles,” Carbo-Valverde said. 

Interestingly, Carbo-Valverde’s research, which included 2,121 survey responses, found that cognitive biases, particularly overconfidence, significantly influence cryptocurrency ownership. More specifically:

“Specifically, individuals whose self-perceived financial knowledge exceeds their actual financial literacy (financial literacy bias) are more likely to own cryptocurrencies.”

Not just a US problem

“This trend is not unique to the United States; similar patterns have been observed in various geographic regions,” noted Carbo-Valverde. It appears to be a characteristic of the crypto phenomenon rather than a feature specific to any particular jurisdiction.

A significant share of Canadian Bitcoin owners, for instance, have low crypto knowledge and low financial literacy, according to a March 2024 paper in the Journal of Financial Literacy and Wellbeing that used microdata from the Bank of Canada’s Bitcoin Omnibus Survey. 

Crypto financial literacy rate versus regional financial literacy rates of adults in 2024. Source: PiP World

That paper, based on a survey that assessed finance literacy based on three questions (“The Big Three”), devised by the Wharton School’s Annamaria Lusardi and Olivia Mitchell, also uncovered gender differences in crypto literacy among Bitcoin owners, “with female owners scoring lower in Bitcoin knowledge than male owners.”

Others find no knowledge problem

Still, not all agree there is a “literacy” problem. That is, crypto or Bitcoin ownership may not be correlated with deficient financial knowledge. 

A survey of the US population conducted by the University of Cincinnati’s Cryptoeconomics Lab found that crypto owners actually score higher than non-crypto owners on the financial literacy scale, the Lab’s director, Michael Jones, told Cointelegraph. 

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This survey, like the Canadian survey referenced above, also followed the principles outlined by Lusardi and Mitchell in their financial literacy scale development. Crypto owners, on average, earned a score of 4.1 (out of 5), whereas non-crypto owners had an average score of 3.7, according to Jones, who is also an assistant professor of economics at the University of Cincinnati.

Jones doesn’t find anything untoward about these results, either. They make sense because cryptocurrency owners often want to learn more about the traditional financial sector. For example, if a cryptocurrency owner is learning about yields in DeFi, “he might want to learn more about interest rates and monetary policy in general,” said Jones, adding:

“I would argue that cryptocurrency adoption can be an effective vehicle for increasing financial literacy.”

Different methodologies may skew results

How does one square Jones’ findings with the PiP World report cited above?

“This discrepancy likely arises from differences in methodology and sample representation,” PiP World CEO Saad Naja told Cointelegraph. The University of Cincinnati study appears to focus on direct comparisons between crypto and non-crypto owners, likely measuring financial literacy broadly, he added.

PiP took a deeper dive into the crypto-native community, segmenting it by behavior, sentiment and persona. “What we uncovered is that technical fluency with blockchain technology does not always correlate with financial literacy,” said Naja, adding:

“Many users are highly knowledgeable about crypto protocols yet struggle with fundamental concepts like diversification, risk management and long-term financial planning.” 

Their most surprising finding, according to Naja, “was the stark contrast between financial literacy levels across different personas within the crypto community.” 

For example, personas like the “hodler” or “Whale” demonstrated relatively high financial literacy rates compared to personas such as “The Pump and Dumper” or “The Day Trader.” 

“This disparity highlights that the community is far from homogenous, with significant gaps in understanding basic financial principles,” Naja said. Another conclusion: Enthusiasm for the technology does not necessarily translate into sound financial decision-making, he added. 

Could an investment-savvy user base tame volatility?

Some say that a more financially literate user base might reduce cryptocurrencies’ wild market price swings, which have dogged the sector from its inception.

Uninformed retail investors are more likely to panic during market downturns, Kadan Stadelmann, chief technology officer of Komodo, told Cointelegraph, “or fall prey to pump-and-dump schemes, further destabilizing the market.” 

“Understanding long-term economic fundamentals for assets like Bitcoin encourages retail investors to hold crypto assets when prices drop,” Neil Bergquist, co-founder and CEO of Coinme, told Cointelegraph. This could only strengthen the market in its ability to withstand wide price fluctuations, in his view.  

Maybe these findings don’t really matter because many future investors are going to access crypto through financial advisers and investment vehicles like exchange-traded funds, or ETFs. Those funds are often managed by TradFi giants like BlackRock and Fidelity, and arguably offer another layer of protection for new investors.

While financial advisers and ETFs can simplify crypto investment, relying solely on these vehicles doesn’t negate the importance of financial literacy, said Stadelmann, who added:

“Furthermore, crypto’s ethos emphasizes decentralization and personal control, which requires a baseline of knowledge. For those actively engaging in DeFi or trading, financial literacy is essential.”

Advisers and ETFs might ease access, but broader education ensures long-term market stability and responsible adoption, said Stadelmann.

Does social media heighten risks?

Some suggest that social media may amplify the risks inherent in financial illiteracy. 

An October report on crypto assets by IOSCO (International Organization of Securities Commissions) noted that many prospective crypto-asset investors are on social media, which isn’t always the best source for investment information. That report quoted from an Italian survey which concluded that:

“Those who rely more on social media for investment information, being less financially and digitally literate and/or more financially fragile, may be more likely to be exposed to the risk of making investment decisions of which they are not fully aware.”

“Reliance on social media for investment information remains a significant concern,” said  Carbo-Valverde, particularly within the cohort of financially illiterate investors. “Social media often amplifies misinformation, fosters herding behavior, and exacerbates cognitive biases like overconfidence and FOMO [fear of missing out].”

Financial literacy rates by crypto community segments. Source: PiP World/Coinfessions

“Criminals and scammers take advantage of people on social media through fake celebrity endorsements, phishing attempts, fake websites to steal personal information and other types of fraud,” added Berguist. Given the risks, more knowledge and critical thinking with regard to investments could be useful.

“If most adopters possessed a high level of financial literacy, the risks associated with social media would be significantly reduced,” added Carbo-Valverde.

Do governments have a role to play here? Maybe laws and regulations with clear guardrails could help? 

Clear cryptocurrency and blockchain regulations could improve financial literacy by establishing a framework that simplifies complex concepts and builds public trust, said Stadelmann. But “regulations alone may not ensure widespread financial understanding.”

Look at US equity markets. Those have been tightly regulated for a long time, but “many individuals still lack a deep grasp of how it functions, including key concepts like market orders, dividends, or portfolio diversification,” Stadelmann added. 

A need to ‘prioritize’ education

If one agrees that a financial education deficit exists, what is the answer? If the industry hopes for mainstream adoption, it must focus on simplifying user experiences and onboarding and educating retail investors about crypto and how it works, said Bergquist. 

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“Our top recommendation would be for the crypto industry to prioritize accessible and engaging financial education,” said Naja. It might begin with integrating educational resources into onboarding processes, wallet apps, exchanges and so on. 

“Initiatives like gamified learning platforms, bite-sized courses, or even embedded risk calculators can help bridge the knowledge gap,” Naja added.  

Overall, it behooves the industry to “prioritize education,” making sure that both new and existing investors understand the fundamentals, risks and opportunities, said Stadelmann.