But we know that QE doesn’t work and reserves don’t reach the broader population, so what is happening?

Another popular reason cited for cryptos’ rise in price and popularity is that the low yield environment created by central banks has forced investors to move into ever more risky assets in order to earn some kind of meaningful return.

This does have a ring of truth to it, after all interest rates are at historic lows and investors are pushing into assets they would have previously classified as “too risky”.

However, this does not take into account the fact that cryptos began as, and at this point continue to be, an asset that is primarily held by individual investors. 

Individual investors simply do not have the same kind of access to the financial markets as professional money managers do.

Even if they did, very few have the time and resources to not just educate themselves on the subject matter, but also to be involved in markets to an extent where they gain enough experience to properly understand how everything works.

Consequently, individual investors think of investing very differently from institutional ones.

The primary consideration for most is how much interest they earn in their bank accounts; those who are more adventurous venture into stocks and/or real estate.

From this standpoint, would individual investors move into crypto assets because their banks are paying pitiful interest rates?

Possibly, but there is another way to look at it, which is that investors who have relatively low levels of capital tend to be more willing to jump at opportunities to make a quick buck.

Consider the reality:

An asset manager with $100 billion in assets, who owns a “safe” portfolio in this age of ultra low rates which yields 1%, will generate $1 billion.

For an individual investor with $100,000 in savings, that same portfolio will generate just $1000, which, obviously, will not have much impact on the individual’s life.

Absolute amounts matter a lot more for individuals than they do for institutions; it’s money that can fund the purchases of cars, houses, holidays, college tuition for kids, etc.

Hence, individual investors rarely think of yields in the same way financial institutions do, simply because the absolute amount they earn in interest income doesn’t really move their financial needle. 

They don’t buy cryptocurrencies because their banks are paying low interest rates, they buy cryptocurrencies because they think their investment will net them a large multiple of profit – an amount large enough to change their lives.

As such, to the individual investor, owning crypto really isn’t about yields.

For better or worse, it’s about the hope and potential of making a life changing amount of money which allows them to break out of the wealth inequality trap that QE has exacerbated.

To be continued…