The role of financial literacy in shaping cryptocurrency investment decisions

The rapid growth of cryptocurrencies as an investment class presents both opportunities and challenges, highlighting the role of financial literacy in navigating this volatile market. This study investigates how objective and subjective financial literacy shape cryptocurrency investment decisions in Croatia, distinguishing between (i) the decision to own cryptocurrencies and (ii) behaviors among cryptocurrency holders. Online survey data were collected from 442 Croatian adults. Using structural equation modeling (SEM), we find that financial literacy significantly impacts cryptocurrency ownership, with the effect of objective literacy being approximately twice as large as that of subjective literacy. Financial literacy supports portfolio diversification by encouraging broader engagement with both traditional and alternative assets, including cryptocurrencies. Further analyses conducted on the subsample of cryptocurrency holders (N = 111) indicate that subjective literacy is associated with greater portfolio allocation to cryptocurrencies and higher profitability, whereas objective literacy is negatively related to profitability. However, its effect on trading strategies during periods of market volatility and the COVID-19 pandemic appears limited, suggesting that experience and emotional factors may play more substantial roles. These results underscore the need for a broader approach that integrates financial literacy education with programs that address behavioral investment strategies. The study also offers valuable insights to policymakers, educators, and investors as cryptocurrencies become more widely accepted across society.