Investor Behavior and Adviser Loyalty in the Crypto Era: The Impact of Financial Instability and Corporate Misconduct

The crypto market's volatility and the prevalence of high-profile scandals have fundamentally reshaped investor behavior and adviser loyalty in the post-2022 landscape. As financial instability-exemplified by the FTX and Terra/Luna collapses-and corporate misconduct, such as misrepresentation and fraud, continue to erode trust, investors are increasingly re-evaluating their portfolios and switching financial advisers. This shift reflects a broader recalibration of risk tolerance, regulatory scrutiny, and the psychological dynamics of crypto investing.

Financial Instability and Behavioral Shifts

The collapse of major crypto entities like FTX and Terra/Luna in late 2022–2023 triggered a seismic shift in investor sentiment. A 2024 study analyzing Twitter data and natural language processing revealed that cryptocurrency enthusiasts exhibited distinct behavioral patterns post-crash compared to traditional investors. While conventional markets saw heightened panic, crypto enthusiasts displayed a surge in neutral sentiment and collective optimism, encapsulated in the rallying cry "wagmi" (We Are Gonna Make It). This herding behavior-driven by cultural artifacts like NFTs and a shared belief in long-term value-led many to hold onto their assets despite negative returns, contrasting sharply with traditional investors' tendency to liquidate during downturns according to the study.

However, this resilience has a limit. The same study noted increased engagement and discussion around portfolio diversification and risk management, signaling a gradual shift toward more cautious strategies. For instance, post-FTX, many investors began allocating smaller portions of their portfolios to crypto, favoring regulated assets or stablecoins. This trend underscores a growing recognition of the sector's systemic risks, even among its most ardent supporters.

Corporate Misconduct and Adviser Switching

Corporate misconduct has further accelerated adviser switching and portfolio re-evaluation. Legal cases like the $37.5 million settlement involving Silvergate Capital Corp.-where plaintiffs alleged misrepresentation of anti-money laundering practices-and the $20 million settlement against Pluralsight, Inc. for misleading sales force disclosures, highlight how trust erosion drives investors to seek new guidance. These cases, along with the manipulation scandals surrounding Credit Suisse's XIV Exchange Traded Notes, have prompted a wave of lawsuits and regulatory actions, compounding investor skepticism.

Quantitative data on adviser switching rates remains sparse, but qualitative evidence suggests a clear trend. A 2023–2025 academic analysis of the FTX and Celsius collapses found that corporate misconduct normalized unethical practices within these firms, fostering a "cult of personality" culture that contributed to their downfall. This has led investors to prioritize advisers with strong compliance track records and transparent strategies, particularly in the crypto space.

The Road Ahead: Trust and Regulatory Imperatives

The interplay of financial instability and corporate misconduct has created a paradox: while crypto investors remain drawn to the sector's potential, they are simultaneously demanding higher standards of accountability. This duality is evident in the rise of "regulated crypto" products and the growing influence of institutional-grade advisers who specialize in navigating the sector's legal gray areas.

Regulatory bodies are also stepping in. The U.S. Securities and Exchange Commission (SEC) has intensified its focus on crypto compliance, with Chair Gary Gensler emphasizing the need for clearer frameworks to protect retail investors. Such efforts may mitigate future crises but will likely require time to reshape market dynamics.

Conclusion

The crypto era has redefined investor behavior, blending optimism with pragmatism in the face of instability and misconduct. Adviser switching and portfolio re-evaluation are no longer reactive measures but strategic responses to a rapidly evolving landscape. As the sector matures, the balance between innovation and regulation will determine whether crypto remains a high-risk, high-reward niche or evolves into a cornerstone of mainstream finance.