May 8, 2024
By Anjali Kochhar
The emergence of cryptocurrencies has had a profound impact on consumer behavior and sparked contentious debates in the rapidly evolving world of finance. In the context of cryptocurrency investment, a recent study by researchers from Brigham Young University, Northwestern University, Emory University, and Imperial College London sheds light on the intriguing phenomenon known as the wealth effect.
Titled “Crypto’s Impact on Consumer Spending: Unveiling the Wealth Effect,” the study delves into how early investments in cryptocurrencies have transformed the financial outlook for many individuals, leading to a surge in discretionary spending. Contrary to popular belief, the study reveals that the newfound wealth generated from crypto investments has not solely been splurged on luxury items like Lamborghinis and extravagant jewellery.
Analysing data spanning from 2010 to 2023, encompassing millions of bank, credit, and debit card transactions from 60 million individuals, the researchers uncovered fascinating insights into the spending habits of households with crypto investments. Surprisingly, the study found that while crypto wealth did contribute to increased consumption, the magnitude of this effect was more subdued compared to windfalls from traditional income sources such as lottery winnings.
According to the findings, for every dollar of unrealised gains from cryptocurrency investments, approximately nine cents were spent. This stands in stark contrast to the propensity to consume observed among lottery winners, suggesting that households treat crypto investments more akin to traditional equity holdings rather than speculative gambling endeavours.
Darren Aiello, assistant professor of finance at Brigham Young University’s Marriott School of Business and co-author of the paper, emphasises the importance of understanding how households allocate their crypto gains. He notes that while there is a perception of crypto as a speculative asset, the study’s findings indicate a more tempered approach to spending among investors.
The study also highlights the diverse motivations behind crypto investments, with some individuals viewing it as a means to bolster savings for significant purchases such as homes. This nuanced perspective underscores the complexity of the crypto market and its appeal to a wide range of investor types.
With the recent launch of spot-Bitcoin exchange-traded funds (ETFs) expanding the accessibility of crypto investments, economists are paying closer attention to the implications for consumer behaviour and the broader macroeconomic landscape. Jason Kotter, another assistant professor of finance at BYU and co-author of the paper, emphasises the ongoing debate surrounding the role of crypto in household portfolios, given its volatility and uncertain fundamentals.
The study sheds light on the relationship between cryptocurrency investments and consumer spending, challenging conventional thinking and emphasizing the necessity for additional research into this quickly growing field of finance. As the cryptocurrency market matures, its impact on household finances and economic dynamics is expected to remain a hot topic among researchers and policymakers alike.
About the author
Anjali Kochhar covers cryptocurrency stories in India as well as globally. Having been in the field of media and journalism for over three years now, she has developed a sharp news sense and works hard to present information that goes beyond the obvious. She is an avid reader and loves writing on a wide range of subjects.
