It’s an oft-told anecdote littering social media: Those who invested early in cryptocurrencies enjoyed life-changing riches.
How much that extra money gives them confidence to spend more—a phenomenon economists call the wealth effect—has become a hot topic whenever cryptocurrency prices rise. A group of researchers tried to quantify and determined that crypto bonuses in the US are spent differently than windfalls from lottery winnings. And so far the effect on the $28 trillion American economy has been relatively modest. But if the asset class continues to boom, the research provides insight into potential changes in consumer patterns.
The researchers estimate that the new wealth increased household consumption by a total of about $30 billion over ten years, with each dollar of unrealized gains resulting in about nine cents of spending. Although this figure is almost twice the marginal propensity to consume, when it comes to stock market returns, it is about one-third less than for income shocks such as lottery winnings. Despite all the changes on social media, not everything has been about Lamborghini and bling: some have gone to buy houses, boosting real estate markets where cryptocurrency is popular.
“If households tend to view cryptocurrency as gambling, then we would expect them to spend their income in the same way as lottery winners do.” Darren Aiello, an 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 show that household spending from crypto income is more similar to the patterns we see in traditional equity investments.”
The topic is likely to attract more attention from economists after the launch of spot bitcoin exchange-traded funds this year broadened the pool of potential crypto investors.
Researchers who presented paper to the Federal Deposit Insurance Corporation in March, they also come 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 crypto wealth flows into the real American economy. They found that 16% of households analyzed had made deposits on retail cryptocurrency exchanges at some point in the decade leading up to 2023.
Making the connection between spending and investing in cryptocurrency can be tricky, as some may invest in the asset class in hopes of increasing their savings to make a large purchase, rather than deciding to make a large purchase only after an unexpected success in cryptocurrency. As a result, the researchers isolated the portion of household cryptocurrency income that was driven by long-term buying and holding rather than recent investments to directly measure the causal impact of cryptocurrency on spending.
“There is significant debate about the role of cryptocurrency in a household portfolio due to its high volatility and murky fundamentals.” Jason Cotteranother associate professor of finance at BYU who co-authored the paper said in an interview.
Noel Acheson, author Cryptocurrency is now a macro The newsletter’s insights into why cryptocurrencies appeal differently to different types of investors are more noteworthy than the macroeconomic implications. “For low-income investors who place less emphasis on wealth preservation, cryptocurrency allocation can be seen as a make-or-break game—more to gain 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 most of the wealth gains were driven by discretionary spending, a significant portion came from local housing markets, the researchers found, especially in parts of California, Nevada, Utah and other places where cryptocurrency is popular.
To get the figure, the researchers went back to 2017, when the price of Bitcoin rose from about $950 to $14,000, a gain of nearly 1,400%. Using zip codes associated with brokerage accounts, they compared what happened to home prices in counties with high levels of cryptocurrency wealth compared to those that were less enthusiastic about digital assets. They found that home prices in cryptocurrency-rich counties rose 43 basis points faster, causing the average home price to rise by about $2,000 over 12 months.
They analyzed what this would look like over the decade to 2023 and found that every dollar generated by households’ crypto wealth increased the average home price by 15 cents over the next three months.
The researchers also tracked investors who withdrew at least $5,000 from their cryptocurrency brokerages between 2018 and 2023 (about 90% of which came from Coinbase Global Inc.). This analysis found that Americans increased their total spending in the year following the large withdrawal by approximately $5,754 compared to the previous year. And while mortgage costs remained constant in the six months leading up to the large withdrawals, they rose significantly after the event.
“For every household that withdrew $5,000 from their cryptocurrency account, one in 20 bought a home for the first time,” Cotter said.
After all, you can’t live in a Lambeau.