With the recent Bitcoin boom, it can be tempting to jump in, but understanding how the price of Bitcoin moves is important. A recent study called Betting on Bitcoin: How social collectives shape cryptocurrency markets explores how different groups and behaviours may impact the price.
Based on an empirical study with Australian cryptocurrency communities, the paper identifies and characterises four distinct roles ‘everyday Australians’ perform when building cryptocurrency markets, and how their actions influence the market size, market offerings and market functioning. Canstar caught up with Dr Christoph Breidbach to learn about how consumer behaviour has affected the rising price of Bitcoin.
Q. What are the categories of social collectives and how do you know where you fit?
A. We studied how Australian community groups shaped the market for cryptocurrencies. We conceptualized these groups as social collectives, a term that we use to describe groups of Australians who are distinct from firms in that they share a common situation-specific understanding of self. What this means is that individuals self-categorize as members of a collective through socio-psychological processes. In contrast, firms possess formal contracts, with membership (i.e., employment) being contingent on formalized processes that exclude self-categorization (i.e., hiring processes).
Our empirical research demonstrated that individual members of cryptocurrency communities performed four distinct roles when shaping cryptocurrency markets: “Freshman”, “Fortune Hunter”, “Idealist”, and “Trail-Blazer”.
“Freshman” represented the majority of individuals in the cryptocurrency communities that we studied. Freshman were members of the general public, for example, retirees or individuals without any prior knowledge about cryptocurrencies. Their involvement in the community was motivated by the desire to acquire new knowledge about cryptocurrencies like Bitcoin. Though their role was comparatively passive, the constant stream of incoming Freshmen increased the size of the communities overall. Importantly, we observed that Freshmen eventually transitioned into other roles within cryptocurrency communities, so that this role essentially represented a ‘stepping-stone’ into cryptocurrency markets.
“Fortune-Hunter” already had some experience with cryptocurrencies; for example, through trading, by participating in Initial Coin Offerings (ICOs), or by actively contributing to the pool of available cryptocurrencies as dedicated miners. Unlike Freshmen, Fortune-Hunters had a sophisticated knowledge of, and interest in, cryptocurrencies beyond Bitcoin. However, Fortune-Hunters were, first and foremost, driven by the desire to reap monetary benefits for themselves. Fortune-Hunters also focused on expanding the impact and relevance of cryptocurrencies in society more broadly. As a case in point, a group of Fortune-Hunters that we studied actively contributed to the alteration of taxation laws, with the intention to make cryptocurrency trading and ICOs more profitable.
“Idealist”, were not motivated by monetary gains but aimed to build, share, and extend the knowledge and skills associated with cryptocurrencies for others. As such, Idealists’ aimed to increase the availability of new resources available within their cryptocurrency group, and included academics, students, or IT-professionals (e.g., developers). They engaged in research and development of cryptocurrency applications – to explore the technical feasibility and social, rather than commercial benefit.
“Trail-Blazer” represented the smallest group overall, and included individuals attempting to engage in commercial cryptocurrency activities. Trail-Blazers had profound expert-knowledge, and aimed to develop cryptocurrency solutions that would benefit society, but also result in monetary gains. As such, Trail-Blazers integrated the characteristics of both, the Fortune-Hunters seeking monetary gains, with those of the altruistic Idealists, who aimed to contribute benefits to a peer-group.
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Q. How have social collectives shaped the recent shift in bitcoin markets?
A. Australian cryptocurrency communities have used multiple actions to shape cryptocurrency markets.
First, members of cryptocurrency communities purposefully shaped an “image” of cryptocurrency markets, before communicating this to others using social media. We call this indoctrination, and explain that this intended to build and enhance a self-conceived identity of what cryptocurrency markets and its participants entailed, and how they work. By actively promoting their values and intentions these individuals established the legitimacy of cryptocurrency markets, and made them more attractive to outsiders – thus attracting these to join the ‘movement’.
Second, members of cryptocurrency communities purposefully engaged in knowledge transfer. As a case in point, gaining access to knowledge was the main motivation of Freshman, who interacted in a unique symbiotic relationship with Idealists, who aimed to develop and provide cryptocurrency-related insights and solutions for others. This exchange involved accumulating knowledge, evaluating it, and developing awareness of its ‘cost’. Consequently, members improved their cryptocurrency-related competencies and became higher-performing market-participants (i.e., when trading Bitcoin). This subsequently attracted new members, including prospective customers (in the case of Trail-Blazers), investment partners (in the case of Fortune-Hunters), or new Freshman, thus extending the size of the cryptocurrency market overall.
Third, members of cryptocurrency communities purposefully developed a common language within the cryptocurrency markets. For example, the general consensus was that members should complete all economic transactions, both within and outside the community, using cryptocurrencies. In doing so, members developed standards needed for the effective and efficient functioning of cryptocurrency markets at large. Developing language and standards thus embodied a necessary precondition to market performance, as it increased the efficiency and effectiveness of economic exchange processes. Specifically, members developed linguistic abbreviations like ‘hodl’, meaning ‘to hold a cryptocurrency for some time’; ‘private key’ – referring to a ‘technical solution needed to ensure secure transaction’; ‘dApps’ – or ‘decentralized applications’; ‘smart contract’ – a ‘self-executing contract without intermediaries’; or ‘solidity’ – referring to a ‘programming language for writing smart contracts’ to be more efficient actors in cryptocurrency markets.
Fourth, members of cryptocurrency communities purposefully promoted and enforced social norms. For one, cryptocurrency communities promoted and enforced social norms through monetary incentives, specifically through Initial Coin Offerings (ICOs). ICOs are similar to IPO (Initial Public Offering) in share markets and, due to the highly speculative nature of cryptocurrencies, promise substantial monetary gains for those able to participate. However, ICO procedures were tightly regulated, with access to ICOs being restricted to those members only who adhered to the existing social norms (i.e., use of cryptocurrencies, shared social identity, etc). It was therefore unsurprising that participants referred to their community as a higher-order social ‘movement’ or ‘revolution’ with dedicated ‘insiders’ and ‘outsiders’.
Q. What are the top concepts that people need to know about market shaping?
A. Neoclassical economics viewed markets as an exogenous reality that cannot be controlled by firms or other market-participants. Today, however, markets are viewed as social structures that can therefore be altered by its participants. What this means is that any firm, individual citizen or not-for-profit organization has theoretically the ability to alter the environment in which it conducts business. We all can shape the market.
Q. What other resources affect the shaping of the market?
A. Market-shaping research typically assumes that firms are the primary actor to lead, manage, and respond to the formation of markets. Our research has challenged this assumption and highlighted that market shaping is a process that can be undertaken by almost everyone. Successful market-shaping typically affects the size of a market – ideally by increasing it; helps to introduce new market offerings and improves market functioning.
Q. What considerations do you have for those considering investing?
A. Investing in cryptocurrencies may provide some with significant monetary returns. However, cryptocurrencies are also a very volatile asset. The risks may therefore outstrip the benefits for many Australians interested in building, for example, a nest-egg to fund their retirement. In addition, when compared to other assets like shares or property, cryptocurrencies have been around for just over a decade, so we know very little about their long-term prospects. For those interested in cryptocurrencies and cryptocurrency investing, I suggest to first and foremost learn as much as possible. One way to get started may be to join a cryptocurrency community group – similar to the ones we studied in our empirical study. These groups can provide an opportunity to meet like-minded individuals who are often willing and interested in sharing their knowledge with novices.
Main image source: Dmitry Demidko (Unsplash)
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About Dr Christoph Breidbach
Dr Christoph Breidbach is a Senior Lecturer in Business Information Systems at The University of Queensland Business School. His award-winning research investigates how new technologies transform the world in which we live, focussing especially on the digital transformation of financial services. One of his greatest regrets is not buying Bitcoin in 2014.