A version of this article first appeared in CNBC's Inside Wealth newsletter with Robert Frank, a weekly guide for high-net-worth investors and consumers. Register to receive future issues, directly to your inbox.
The rising price of bitcoin helped create another 70,000 new crypto millionaires over the past year, adding hundreds of billions of dollars in potential spending to the economy, according to new studies.
There are now an estimated 241,700 people with cryptocurrency holdings worth $1 million or more, up 40% from last year, according to Henley & Partners and New World Wealth. According to the report, there are 450 crypto centimillionaires, or those with cryptocurrency holdings of $100 million or more, and 36 crypto millionaires.
The price of Bitcoin has more than doubled over the past year, as the dollar falls and concerns about deficits and fiscal spending rise. Friendlier regulation in the United States and broader adoption by investors and traditional financial services companies have also increased demand. On Monday, bitcoin surpassed $125,000 for the first time before falling back to around $122,000.
The world's total cryptocurrency market capitalization has skyrocketed to more than $4.3 trillion, adding $2 trillion in paper wealth over the past three years. While still small compared to recent stock market gains (with Nvidia itself valued at over $4 trillion), the cryptocurrency boom has created substantial wealth for millennials and younger investors who were the first to invest in cryptocurrencies.
“Bitcoin is becoming the basis of a parallel financial system, where it is not simply an investment to speculate on fiat price appreciation, but the base currency to accumulate wealth,” said Philipp Baumann, founder of Z22 Technologies, a cryptocurrency trading company.
The new class of crypto-rich is so recent that reliable research on their spending and investing habits remains scarce. But a new paper from a group of economists who analyzed crypto wallets sheds light on some common characteristics and overall spending.
The study, conducted by Brigham Young University professors Darren Aiello, Mark Johnson, and Jason Kotter, along with Scott Baker of Northwestern University, Tetyana Balyuk of Emory University, and Marco Di Maggio of Imperial College London, analyzed cryptocurrency investors based on transfers to and from exchanges. cryptocurrencies.
They found that cryptocurrency investors spent approximately 9.7 cents for every dollar in additional crypto wealth. This ratio, known as the marginal propensity to spend, was more than twice the level typically found for gains in the stock market or home values. Since cryptocurrency investors tend to be younger, they also tend to spend more of their wealth gains compared to older investors.
The report's authors estimate that the additional wealth generated by crypto profits accounted for $145 billion in additional spending in 2024, or about 0.7% of total US consumption.
However, cryptocurrency declines have the opposite effect.
“While the massive rise in crypto wealth over the past decade has likely contributed positively to economic growth through consumption spillovers, this symmetry suggests that large crypto declines could put significant negative pressure on the economy as investors reduce consumer spending,” according to the study.
The authors say that cryptocurrency investors tend to fall into two broad categories: casual cryptocurrency investors, who have a relatively small portion of their investments in cryptocurrencies, and “all-in” investors, who allocate 100% of their investments in cryptocurrencies. More diversified cryptocurrency investors tend to spend a larger portion of their profits. All-in investors rarely change their spending as they have “strong convictions” about the future of cryptocurrencies and rarely sell.
When it comes to their spending, the crypto-rich who buy Lamborghinis and Rolexes seem to be more of a high-profile exception than the rule. The study said that most consumption occurs in restaurants, entertainment and general merchandise.
A previous study by the group found that real estate is very popular among the crypto-rich. The research looked at home prices in counties with large cryptocurrency populations versus counties with low cryptocurrency populations. The study found that when bitcoin skyrocketed, home prices grew 0.46% faster in cryptocurrency-heavy counties.
“We find that increases in crypto wealth cause a significant increase in house prices,” according to the study.
However, the current Bitcoin boom may not lead to a sudden rush of spending. Tad Smith, former chief executive of Sotheby's and now a partner at 50T Funds, a growth equity firm focused on digital assets, said many wealthy crypto investors are holding on to their bitcoins and other tokens waiting for a new price rise.
“They want to fully invest because this is the moment they've been waiting for,” Smith said. “For them, this is not the time to sell.”
Smith said that while some bitcoin mega-holders, known as “whales,” may occasionally be cashing out a small portion of their holdings in the current price surge, the vast majority of committed crypto investors are pouring even more money into the asset class.
In the long term, Smith said that as cryptocurrency investors age and start families, more of their spending will go toward real estate rather than flashy cars or watches.
“In the last big cycle, they were younger,” Smith said. “Now many of them have children and have a growing family to think about. So their lifestyle choices are different.”
Spending by the crypto-rich is also likely to accelerate as cryptocurrency-backed credit products become more acceptable. Zac Prince, director of GalaxyOne, Galaxy Digital's new trading and financial platform, said that buying a house has been difficult for many wealthy crypto investors due to its crypto collateral.
“Today, if you want to borrow against your cryptocurrency, there are relatively limited options,” he said. “I've heard countless horror stories of people who have millions of dollars in cryptocurrency and want to buy a house, but traditional bank lenders can't approve a mortgage.”
But that trend may be changing. Bill Pulte, head of the FHFA, issued a directive to Fannie Mae and Freddie Mac to consider cryptocurrency assets in their mortgage loan underwriting guidelines.
Prince said that as lenders allow more loans to the crypto-rich, their spending will increase as they will not have to sell their positions to obtain liquidity.
“The 'buy borrow die' strategy has been around for a long time,” he said. “The problem is that cryptocurrency investors have not been able to access loans.”
