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Crypto brethren have boosted house prices as the wealth effect has hit real estate markets, study says
It’s an oft-told anecdote shared on social media: Those who invested in cryptocurrencies early have enjoyed life-changing wealth.
How much that extra money gives them the confidence to spend more — a phenomenon economists call the wealth effect — is a hot topic whenever cryptocurrency prices rise. A group of researchers tried to quantify this and determined that cryptocurrency goldmines in the United States aren’t exactly being spent as windfalls from winning the lottery. And so far, the effect has been relatively modest on America’s $28 trillion economy. But if the asset class continues to grow, the study provides insight into potential changes in consumption patterns.
The new wealth has increased household consumption by about $30 billion in total over a decade, researchers estimate, with every dollar of unrealized gains 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 a third that of income shocks such as lottery winnings. For all the flexibility on social media, not all was wasted on Lamborghinis and bling: Some focused on buying homes, spurring real estate markets where cryptocurrencies are popular.
“If families tend to view cryptocurrencies as gambling, then we would expect them to spend their earnings in ways similar to those of lottery winners.” Darren Aiello, assistant professor of finance at Brigham Young University’s Marriott School of Business and one of the study’s authors, said in an interview. “Instead, our estimates suggest that household spending from cryptocurrency-related earnings is more similar to the patterns we see in traditional equity investments.”
It’s a topic that’s likely to attract more attention from economists after this year’s launch of spot-Bitcoin exchange-traded funds expanded the universe of potential cryptocurrency investors.
The researchers, who presented the paper to the Federal Deposit Insurance Corp. in March, also come from Northwestern University, Emory University and Imperial College London. They used data on 60 million people from 2010 to 2023, covering millions of banking, credit and debit card transactions, to analyze how crypto wealth flows into America’s real economy. They found that 16% of analyzed households made deposits on retail cryptocurrency exchanges at some point in the decade to 2023.
Linking cryptocurrency spending and investing can be tricky, as some may invest in the asset class in hopes of boosting their savings to make a large purchase, rather than only deciding to make a large purchase after a cryptocurrency windfall. As a result, the researchers isolated the portion of households’ cryptocurrency earnings that were driven by long-term purchases and holdings, rather than recent investments, in order to directly measure the causal effects of cryptocurrencies on spending.
“There is significant debate about what role cryptocurrencies should play in a household’s portfolio due to their high volatility and cloudy fundamentals.” Jason Kotteranother assistant professor of finance at BYU and co-author of the study said in an interview.
For Noelle Acheson, author of the Crypto Is Macro Now newsletter, insights into how cryptocurrencies appeal differently to different types of investors are more noteworthy than conclusions about macroeconomics. “For low-income investors who place less priority on wealth preservation, an allocation to cryptocurrencies could be seen as a make-or-break bet: more to gain than to lose,” she said. “So it makes sense that any earnings would be spent on high-value assets like a house.”
Real estate market
While the increase in wealth was mostly poured into discretionary spending, a significant portion trickled into local real estate markets, the researchers found, especially in parts of California, Nevada, Utah and other places where cryptocurrencies are popular .
To arrive at a figure, the researchers went back in time to 2017, a year in which Bitcoin saw its price jump from around $950 to $14,000 in a rally of nearly 1,400%. Using zip codes associated with brokerage accounts, they compared what happened to home prices in counties with high cryptocurrency wealth versus those less enthusiastic about digital assets. They found that home prices in cryptocurrency-rich counties grew 43 basis points faster, pushing the average home price by about $2,000 in 12 months.
They analyzed what it would look like in 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 next three months.
The researchers also tracked investors who withdrew at least $5,000 from their cryptocurrency brokers, of which about 90% came from CoinBase Global Inc. – between 2018 and 2023. That analysis revealed that Americans increased their total spending in the year after a large withdrawal by about $5,754 compared to the previous year. And while mortgage spending remained steady in the six months before the large 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.