Americans worried about rising consumer prices have dialed back their spending on everything from vacations and new refrigerators to Target clothing and back-to-school supplies.
But there’s one place they’ve sought psychological comfort as higher prices crimp their pocketbooks: Cryptocurrencies.
Investors of all stripes, from wealthy and experienced to modest earners living hand-to-mouth, tend to regard Bitcoin and other digital assets as the strongest investment buffer to inflation, according to a recent Harvard Business School study.
“Our findings suggest that investors, especially sophisticated and low-income ones, likely consider cryptocurrencies as an inflation hedge, even more so than traditional securities such as stocks and bonds,” six economists and finance professors wrote in a working paper published in May.
The study, “Cryptocurrency Investing: Stimulus Checks and Inflation Expectations,” looked at data between January 2010 and May 2021 for transactions between a crypto user’s bank and credit card account and large trading platforms and exchanges like Coinbase.
The price of Bitcoin has plunged 40% since that end date, proving that the asset is far from a hedge against inflation, at least in the shorter run. But that’s not the point of the study.
Instead, the researchers looked at how crypto investors think and feel — factors that drive their spending and investing decisions.
Proponents of digital currencies have long argued that the digital currencies, like gold, make a good buffer against inflation because their supply, like that of gold, is fixed. Unlike central banks, which can print more money, potentially devaluing the purchasing power of existing notes, digital coin outfits (in theory at least) can’t just mint more virtual coins. Nearly one in five, or 17%, of all American adults say they have invested in, traded or used a cryptocurrency, Pew Research Center found in April.
In 2020, when COVID-19 first unfolded, billionaire trader Paul Tudor Jones wrote that he saw bitcoin as a hedge against what he predicted would be rising inflation, writing in a market outlook seen by EuroJournal that “The best profit-maximizing strategy is to own the fastest horse . . . If I am forced to forecast, my bet is it will be Bitcoin.”
One implication of the Harvard study is that the proverbial cash stuffed under the mattress or Bell jar buried in the back yard — now often a high-yielding certificate of deposit, high-interest bank account or perhaps gold — may be more likely to also be a digital wallet stuffed with cryptocurrency.
“As global fiat (government-issued money) begins to devalue, people will begin to look for assets that can’t be debased, so over time, money will flow into assets like bitcoin,” said Mike Sourodi, a financial advisor at Digital Asset Investment Management in Newport Beach, California.
Consumer prices rose an annualized 7% in 2021, including a more than 33% spike in energy costs and 6.3 % hike in food costs, according to the Bureau of Labor Statistics. In May of that year, Bitcoin averaged around $46,600.
Since then, inflation has persisted, peaking at a 40-year high in June 2022 and settling at 6.5% last year. So far this year through August, prices have risen 3.7% over the prior 12 months’ level. The Federal Reserve targets price increases of 2% a year.
On Monday, Bitcoin traded at around $27,700 — close to half the May 2021 level captured in the Harvard study.
In reality, digital coins have been far from a hedge against inflation — but beliefs drive investment decisions. “It might not be a short-term hedge, but long term, it will work,” Soroudi asserted.
The Harvard study found that a one percentage point increase in the Consumer Price Index of urban consumers, a broad measure of inflation, was associated with a 0.8% increase in the likelihood of consumers plowing dollars into digital currencies.
Economists already know that millions of Americans put some of their pandemic stimulus money into cryptocurrency investments. Three government checks totaling $3,200 were doled out to millions of adult Americans between April 2020 and March 2021. Nearly one in 10 Americans invested some of the government windfall in cryptocurrencies, a Harris poll 2021 found; the Cleveland branch of the Fed found that the first stimulus check boosted Bitcoin’s trading volume by about 3.8%.
Across all three stimulus rounds, consumers invested $5.09 in crypto and $8.23 in traditional assets for every $1,000 of stimulus check pay, the Harvard study found. Most investors were concentrated in California and New York.
“It doesn’t feel like these investors are doing anything crazy,” Harvard Business School professor Marco Di Maggio, one of the Harvard study’s co-authors, was quoted as saying in a note last month. “One reasonable view is that the market is more mature than people believe … We are not talking about a niche market anymore.”
The study found that cryptocurrency investors exhibit a wide range of traits. Overall, they have higher household incomes, live in wealthier and more educated Zip Codes, like to gamble, frequently use credit cards and often overdraft their checking accounts. Such investors are drawn by “the lure of potentially higher returns in a ‘lottery-style payoff’ than investors expect with traditional investments,” the study said.
Investors first bought cryptocurrencies in force in 2017, when Bitcoin had a huge run up to more than $20,000, then a record. Demand spiked against amid the onset of the pandemic.
One question the Harvard study sought to answer was whether the exuberance of 2020-2022 was partly based on the entry of less and less sophisticated investors, what it called the “greater fool” theory.
Their answer to the sensitive question, based on the data for 59 million consumers they analyzed: While in general crypto investors have higher income and higher financially stability, that is predominantly true for people who got in prior to the 2017 boom, when newer adopters came on board.
“Early adopters withdrew crypto during that peak, while newer adopters piled in,” the researchers wrote — a rush that “might resemble the dynamics of a bubble.” Since then, low-income earners have “increased their crypto investments more in response to increases in inflation expectations, perhaps because they have less wiggle room in their budgets.”