From Memes to Mainstream: Crypto's Potential Wealth Effect

Remember the "Lambo" memes flooding social media a few years back? Images of ecstatic young investors celebrating newfound wealth, supposedly fueled by their early foray into cryptocurrencies, became a cultural phenomenon.

While these anecdotes might seem like outliers, they raise a critical question: is cryptocurrency creating a new kind of wealth effect, one that could ripple through the economy?

Is Crypto Wealth Real Wealth?

The traditional wealth effect refers to how changes in stock market valuations influence consumer spending. As stock prices rise, individuals feel wealthier and more confident, leading them to loosen their purse strings. This increased spending injects money back into the economy, potentially boosting growth.

Cryptocurrencies, with their meteoric rise and spectacular falls, present a unique twist on this concept. Unlike traditional investments like stocks, crypto often carries an air of "get rich quick" schemes.

This perception, fueled by social media portrayals and volatile price movements, can lead to a different kind of wealth effect – a "crypto bonanza" effect.

Recent research sheds light on how these crypto windfalls are actually spent. The findings suggest that unlike lottery winners who tend to blow their entire windfall, crypto investors are more measured in their spending.

"Overall, consumption behavior following crypto gains is broadly similar to consumption behavior following equity gains. Together, this evidence suggests that for the average household, investing in cryptocurrencies is treated much the same as investing in after-tax brokerage accounts," authors of research paper "The Effects of Cryptocurrency Wealth on Household Consumption and Investment" said.

The research notes that crypto investors allocate a smaller portion of their newfound wealth (around nine cents on the dollar) to increased spending compared to traditional wealth effects.

This measured approach could be due to the inherent volatility of cryptocurrencies. Unlike a steady rise in stock prices, crypto values can fluctuate wildly. Investors might be more cautious, viewing their crypto wealth as "unrealized profits" until it's cashed out.

However, the study also points out a crucial difference from traditional wealth effects. A portion of the crypto windfall is being directed towards housing, particularly in regions where cryptocurrency is popular. This could have a significant impact on local economies, potentially fueling a housing boom in certain areas.

While the overall impact on the US economy, measured in trillions of dollars, has been minimal so far, the research offers a glimpse into a potential future.

Crypto Matures

If the cryptocurrency asset class continues to grow and mature, the way these "crypto bonanzas" are spent could become a significant game-changer in consumer trends, impacting spending habits and potentially even local economies.

Institution-only global exchange, AsiaNext, has monitored how TradFi is warming to cryptocurrency too.

"The biggest names in fund management are now investing in Bitcoin - ?it’s clear the market is seeing crypto as an?investable?asset. Analysts at?Standard Chartered?anticipate fund inflows in the range of $50 billion to $100 billion in 2024, in the $30 trillion advised wealth management industry," AsiaNext CEO Kok Kee said exclusively to Blockhead.

A survey presented by AsiaNext and SBI Digital Asset Holdings in November 2023 showed that two-thirds of institutional investors experienced an increase in exposure to digital assets over the year; 60% saw increased client demand for STOs.

Sygnum senior vice president Benedict Yap said the mindset of institutions is changing to be more welcoming towards crypto.

"I wouldn't say there has been a big change in the acceptance of crypto. But rather the mindset of those who are engaged in the business of asset management has begun to shift," Yap said to Blockhead.

"Keeping an open mind is essential to becoming a better, more evolved investment manager because you're recognizing new asset classes for what they are - a source of returns, a source of risk, a source of diversification," he explains.

What Next?

As TradFi begins to treat crypto as a legitimate asset class, wealth building through crypto becomes equally as credible. However, the lustre seems to be fading on cryptocurrency exchange-traded funds (ETFs), particularly in the US.

After a brutal April that saw?Bitcoin?plummet over 16% – nearly mirroring the November 2022 crash triggered by the FTX collapse – the lacklustre performance has continued into May. This dampens the initial excitement surrounding US Bitcoin ETFs, which launched earlier this year.

For those that missed yesterday's glimpse into what Blockhead's research arm, brn, has to say on the near term expected movements of Bitcoin, fear not:

Bitcoin experienced a temporary dip last week but swiftly recovered. Despite two failed attempts to reach a new all-time high, it demonstrated remarkable resilience against downward pressure. In the coming weeks, we anticipate Bitcoin to trade within a range as the market awaits clearer signals on inflation and potential rate cuts.

While we remain optimistic about Bitcoin's potential for growth, investors should remain vigilant and employ appropriate hedging tools to effectively manage risks.

To read the full report and to receive weekly insights, register your interest at?brn.