Author: Isabelle Lee, Bloomberg; Translated by: Tao Zhu, Golden Finance
It’s an anecdote often circulated on social media: those who invested in cryptocurrencies early have enjoyed life-changing fortunes.
It’s a hot topic every time cryptocurrency prices surge, as the extra cash gives them some confidence and boosts spending (a phenomenon economists call the wealth effect). A team of researchers tried to quantify it and determined that America’s cryptocurrency wealth isn’t exactly being spent like a lottery windfall. So far, the impact on the $28 trillion U.S. economy has been relatively modest. But if the asset class continues to boom, the research offers insights into potential game-changers in consumer patterns.
The researchers estimate that the new wealth boosted household consumption by about $30 billion in total over a decade, with each additional dollar of unrealized gains leading to about 9 cents in spending. While that’s nearly double the marginal propensity to consume from stock market returns, it’s about a third of the income shock from something like a lottery win. Despite all the buzz on social media, Lamborghinis and luxury goods weren’t entirely affected: Some people started buying homes, boosting the cryptocurrency-popular real estate market.
“If households tend to view cryptocurrencies as gambling, then we would expect them to spend their proceeds more like lottery winners,” said Darren Aiello, assistant professor of finance at BYU’s Marriott School of Business and one of the book’s authors. “In contrast, our estimates suggest that household spending from cryptocurrency proceeds is more like the patterns we see from traditional equity investments.”
The topic is likely to attract more attention from economists after the launch of a spot bitcoin exchange-traded fund this year broadened the universe of potential cryptocurrency investors.
The researchers who submitted a paper to the Federal Deposit Insurance Corporation in March this year also came from Northwestern University, Emory University and Imperial College London. They used data from 60 million people from 2010 to 2023, covering millions of bank, credit and debit card transactions, to analyze how cryptocurrency wealth has penetrated into the U.S. real economy. They found that in the decade before 2023, 16% of households had made deposits in retail cryptocurrency exchanges.
Drawing a link between spending and cryptocurrency investments can be tricky because some people may invest in the asset class in hopes of growing their savings to make a big purchase, rather than deciding to make a big purchase after receiving a cryptocurrency windfall. Therefore, the researchers isolated the portion of household cryptocurrency gains that is driven by long-term purchases and holdings rather than recent investments, in order to directly measure the impact of cryptocurrency on spending.
“There is considerable debate about the role that cryptocurrencies should play in household portfolios due to their high volatility and murky fundamentals,” Jason Kotter, assistant professor of finance at Brigham Young University and co-author of the paper, said in an interview.
For Noelle Acheson, author of the Crypto Is Macro Now newsletter, the insights into how cryptocurrencies have different appeals to different types of investors are more interesting than the macroeconomic implications. “For lower-income investors who are less focused on wealth preservation, a crypto allocation may be seen as a make-or-break game — with more upside than downside,” she said. “So it makes sense that any gains would be spent on a big-ticket item like a house.”
real estate market
The researchers found that while the increase in wealth was mostly funneled into discretionary spending, a large portion went into local real estate markets, particularly in California, Nevada, Utah and other areas where cryptocurrencies are popular.
To arrive at that number, the researchers looked back to 2017, a year when the price of Bitcoin jumped from around $950 to $14,000, a nearly 1,400% increase. Using codes associated with brokerage accounts, they compared changes in home prices in areas with high crypto wealth to areas less enthusiastic about digital assets. They found that home price growth in crypto-rich areas accelerated by 43 basis points, resulting in a median home price increase of about $2,000 over 12 months.
Quantifying the Wealth Effect of Cryptocurrencies
One dollar of unrealized cryptocurrency gains results in nine cents of spending
They analyzed the decade to 2023 and found that every dollar increase in household crypto wealth pushed median home prices up 15 cents in the following three months.
The researchers also tracked investors who withdrew at least $5,000 from cryptocurrency brokerages between 2018 and 2023 (about 90% of which came from Coinbase Global Inc.). The analysis showed that Americans spent about $5,754 more in total in the year following the massive withdrawals compared with the previous year. While mortgage spending remained stable in the six months before the massive withdrawals, it has since risen sharply.
“One in 20 households that withdrew $5,000 from their cryptocurrency trading accounts were first-time homebuyers,” Cote said.
After all, you can't live in a Lamborghini.