(Bloomberg) — It’s an oft-told anecdote that’s spread across social media: those who invested early in cryptocurrencies enjoyed wealth that changed their lives.

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How much this extra cash gives them the confidence to spend more – a phenomenon economists call the wealth effect – is a hot topic whenever cryptocurrency prices are rising. A group of researchers tried to quantify it and determined that crypto bonanzas in the US aren’t exactly spent like windfalls from winning the lottery. And so far, the effect has been relatively modest on the $28 trillion US economy. But if the asset class continues to grow, the study provides information on potential drivers of change in consumption patterns.

The new wealth increased household consumption by about $30 billion in total over a decade, researchers estimated, with each dollar of unrealized gains generating about nine cents in spending. While this number is almost double the marginal propensity to consume when it comes to stock market returns, it is about a third of that from income shocks such as lottery wins. Despite all the easing on social media, not everything was wasted on Lamborghinis and accessories: some went into home purchases, boosting real estate markets where crypto is popular.

“If households tend to treat crypto like gambling, then we would expect them to spend their winnings in ways similar to lottery winners,” Darren Aiello, assistant professor of finance at Brigham Young University’s Marriott School of Business and one of the authors of the newspaper, said in an interview. “In contrast, our estimates suggest that household spending on crypto earnings is more similar to the patterns we see in traditional capital investments.”

It’s a topic likely to receive more attention from economists after this year’s launch of spot Bitcoin exchange-traded funds expanded the universe of potential crypto investors.

The researchers, who presented the paper to the Federal Deposit Insurance Corp. in March, they also come from Northwestern University, Emory University and Imperial College London. They used data from 60 million people between 2010 and 2023, spanning millions of bank, credit card and debit card transactions, to analyze how crypto wealth spreads into the real American economy. They found that 16% of households analyzed made deposits to retail cryptocurrency exchanges at some point in the decade to 2023.

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Making the connection between spending and investing in cryptocurrencies can be tricky, as some may invest in the asset class in hopes of building up their savings to make a large purchase, rather than deciding to make a large purchase only after a windfall in cash. cryptocurrencies. As a result, researchers isolated the portion of domestic cryptocurrency earnings that were driven by long-term purchase and holding rather than recent investments in order to directly measure the causal effects of crypto on spending.

“There is significant debate about the role crypto should play in a family’s portfolio due to its high volatility and cloudy fundamentals,” said Jason Kotter, another assistant professor of finance at BYU and co-author of the paper, in an interview.

For Noelle Acheson, author of the Crypto Is Macro Now newsletter, insights into how crypto appeals differently to different types of investors are more noteworthy than conclusions for macroeconomics. “For low-income investors who place less priority on wealth preservation, a cryptocurrency allocation can be seen as a decisive move – more to win than to lose,” she said. “So it makes sense that any earnings would be spent on big-ticket items like a house.”

Housing market

While the increase in wealth has mostly been channeled into discretionary spending, a significant portion has poured into local housing markets, the researchers found, especially in parts of California, Nevada, Utah and other places where crypto is popular.

To come up with a number, the researchers went back in time to 2017, a year in which the price of Bitcoin jumped from around US$950 to US$14,000, with an increase of almost 1,400%. Using zip codes associated with brokerage accounts, they compared what happened to home prices in counties with high crypto wealth compared to those that were less enthusiastic about digital assets. They found that home prices in crypto-rich counties grew 43 basis points faster, raising the median home price by about $2,000 in 12 months.

They looked at what this would look like over the decade until 2023 and found that every dollar earned in household crypto wealth raised the average house price by 15 cents over the next three months.

The researchers also tracked investors who withdrew at least $5,000 from their crypto exchanges — about 90% of which came from Coinbase Global Inc. — between 2018 and 2023. This analysis revealed that Americans increased their total spending in the year after a large withdrawal by about $5,754 from the previous year. And although mortgage spending remained constant in the six months leading up to the big withdrawals, it increased significantly after the event.

“For every household that withdrew $5,000 from their cryptocurrency exchange account, one in 20 purchased a home for the first time,” Kotter said.

After all, you can’t live in a Lambo.

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