(Bloomberg) — It's an oft-told anecdote blowing up on social media: Those who invested early in cryptocurrencies have enjoyed life-changing wealth.
How much extra cash gives them the confidence to spend more — a phenomenon economists call the wealth effect — is a hot topic whenever crypto prices rise. A group of researchers tried to quantify it and determined that crypto coins in the US are not exactly spent like lottery winning windfalls. And so far, the effect has been relatively modest on the $28 trillion US economy. But if the asset class continues to thrive, the study offers insights into potential game changers in consumer patterns.
The new wealth boosted household consumption by about $30 billion in total over a decade, the researchers estimated, with every dollar of unrealized earnings leading to about nine cents in spending. While this figure is almost double the marginal propensity to consume when it comes to stock market returns, it is about one-third that of income shocks such as lottery winnings. Despite all the social media leanings, it wasn't all about Lamborghinis and bling: Some went into house purchases, boosting real estate markets where cryptos are popular.
“If households tend to treat cryptocurrencies like gambling, then we would expect them to spend their winnings in similar ways as lottery winners do. Darren Aiello, assistant professor of finance at Brigham Young University's Marriott School of Business and one of the paper's authors, said in an interview. “In contrast, our estimates suggest that household spending from crypto earnings is more like the patterns we see from traditional equity investments.
It's a topic likely to gain more attention from economists as this year's launch of Bitcoin exchange-traded funds widened the universe of potential crypto investors.
The researchers, who presented paper at the Federal Deposit Insurance Corporation in March, also hails from Northwestern University, Emory University and Imperial College London. They used data from 60 million people from 2010 to 2023, including millions of banking, credit and debit transactions, to analyze how crypto wealth flows into the real American economy. They found that 16% of households analyzed have made deposits to retail cryptocurrency exchanges at some point in the decade to 2023.
Making the connection between spending and investing in crypto can be tricky, as some may invest in the asset class in hopes of growing their savings to make a large purchase, rather than deciding to make a small purchase. big just after a crypto windfall. As a result, the researchers isolated the portion of household crypto earnings that was driven by long-term buying and holding, rather than recent investment, in order to directly measure crypto's causal effects on spending.
“There is significant debate about the role crypto should play in a household's portfolio due to high volatility and murky fundamentals.” Jason Kotteranother assistant professor of finance at BYU, who co-authored the paper, said in an interview.
For Noelle Acheson, author of Crypto is macro now newsletter, insights into how crypto has different appeals to different types of investors are more important than money to the macro economy. “For lower-income investors who place less priority on wealth preservation, crypto sharing can be seen as a make-or-break game – more to win than to lose,” she said. “So it makes sense that any profits would be spent on big-ticket items like a house.”
Housing market
While the increase in wealth flowed mostly into discretionary spending, a significant portion flowed into local housing markets, the researchers found, particularly in parts of California, Nevada, Utah and other places where cryptos are popular.
To arrive at a figure, the researchers went back in time to 2017, a year when Bitcoin saw its price rise from around $950 to $14,000 for an increase of nearly 1,400%. Using zip codes linked to brokerage accounts, they compared what happened to home prices in counties with high crypto-wealth versus those that were less enthusiastic about the digital asset. They found that home prices in crypto-rich counties rose 43 basis points faster, pushing the average home price up about $2,000 in 12 months.
They analyzed how it would look spread over the decade to 2023 and found that every dollar gained in household crypto wealth pushed up the average house price by 15 cents over the following three months.
The researchers also tracked investors who withdrew at least $5,000 from their crypto brokerage — about 90% of which came from Coinbase Global Inc. – between 2018 and 2023. This analysis found that Americans increased their total spending in the year after a major withdrawal by about $5,754 compared to the previous year. And while mortgage costs remained flat in the six months leading up to the big drawdowns, they rose sharply after the event.
“For every household that withdrew $5,000 from their crypto exchange account, one in 20 bought a home for the first time,” Kotter said.
After all, you can't live in a Lambo.