You would never play the lottery, but you are all-in on crypto. What is the difference?

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Posted: June 28, 2023 7:20 a.m. ET

Are cryptocurrencies good for building long-term wealth or are they more like lottery tickets? No one knows for sure, of course. But new research provides deeper insight into what cryptocurrency holders really think.

Their response is surprising. While you would expect buyers to believe cryptocurrencies are good long-term investments, many are behaving as if they view them as lottery tickets.

THE…

Are cryptocurrencies good for building long-term wealth or are they more like lottery tickets? No one knows for sure, of course. But new research provides deeper insight into what cryptocurrency holders really think.

Their response is surprising. While you would expect buyers to believe cryptocurrencies are good long-term investments, many are behaving as if they view them as lottery tickets.

The new research was recently released by the National Bureau of Economic Research. Entitled Do You Even Crypto, Bro? Cryptocurrencies in Household Finance, the study was conducted by Michael Weber from the University of Chicago, Bernardo Candia and Yuriy Gorodnichenko from the University of California, Berkeley, and Olivier Coibion ​​from the University of Texas at Austin.

The researchers base their study on the results of a quarterly survey conducted since 2018 of the approximately 80,000 households that participate in what is called the Nielsen Homescan Panel. In addition to providing detailed demographic information, participating households can track their individual purchases at the Universal Product Code level. The researchers were also able to periodically poll these households on their attitudes toward cryptocurrencies and other asset classes.

Of the many fascinating insights researchers have gained from mining this massive database, the one I want to focus on here is how changes in the price of bitcoin BTCUSD and other cryptocurrencies affect consumer spending. . The researchers found that among those who held cryptocurrencies, price increases led to a significant increase in purchases of expensive durable goods that last for several years. Crucially, however, cryptocurrency price increases have not led to a corresponding increase in spending on non-durable consumer goods that are typically consumed at one time.

The researchers conclude that their findings suggest that changes in cryptocurrency values ​​are not necessarily considered persistent increases in household wealth, as these would tend to fuel unsustainable spending. Instead, the shift to one-time big-ticket items seems to be closer to gambling or small lottery wins. The reasoning of the researchers is that, if crypto investors were confident that the price gains were justified and genuine, there would be no rush to grab the cash and run.

This behavior should be contrasted with how investors generally react to increases in the value of their stock and bond holdings. For the latter two asset classes, the researchers found that rising valuations passed through to higher spending on durable and non-durable goods, and that this transmission was strongest for bonds. This is consistent with investors in these other asset classes seeing increased valuations as persistent increases in wealth.

The bottom line: If you invest in cryptocurrencies, or are a financial advisor who recommends them to clients, pay close attention to reactions when the value of these currencies rises. If the inclination is to cash out quickly, that means crypto is more of a lottery ticket than an investment.

Mark Hulbert is a regular MarketWatch contributor. His Hulbert Ratings tracks investment newsletters that pay a fixed fee to be audited. He can be contacted at [email protected]

More: Crypto can become an integral part of investors’ portfolios once regulations are clear, says Franklin Templeton

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