Financial regulators can noticeably increase the impact of their warnings about the risk of investing in crypto assets by incorporating “behaviourally informed” messages about the dangers of losing money, a new study has indicated.
Research conducted by the Central Bank of Ireland found that more specific warnings about the risks associated with the asset class, coupled with price volatility information, can improve risk comprehension and perception among at-risk investors.
In a research paper published on Tuesday, Central Bank economist Danish Us-Salam said that younger people “with less investment experience” tend to be the most at-risk of falling prey to bad information about crypto products.
“Inexperienced investors are particularly at risk, as information on social media platforms and aggressive marketing campaigns can positively influence their investment decisions,” he said.
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The research is based on an online experiment in which participants viewed promotions for crypto assets and more traditional stock investments.
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The study found that risk perception increased notably among subjects who were given more behaviourally specific, detailed warnings about risky investments.
One such warning given to participants was: “Don’t invest in crypto assets unless you’re prepared to lose all your money. This is a high-risk investment. You could lose all your money and are unlikely to be protected if something goes wrong.”
Risk comprehension and perception increased among participants exposed to this message compared with those exposed to the standard “your capital is at risk” warning, typical of many financial products.
Mr Us-Salam said the findings support policymakers’ mandate to “design and implement risk communication strategies that are not only informative but also behaviorally cognizant”.
He said: “Enhanced risk warnings that strategically increase the salience of critical information and employ recency effects can lead to better-informed investment decisions, thereby safeguarding individuals at risk of investments in crypto assets.”
Central Bank governor Gabriel Makhouf has long taken a sceptical view of crypto assets, saying most explicitly in a blog post two years ago that it “might be more accurate” to describe them as “Ponzi schemes” rather than investments.
The regulator continues to warn potential investors that crypto assets are not regulated financial products and that consumers “face the possibility of losing all their money if they buy crypto”.
