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U.S. Treasury Study Links Cryptocurrency Gains to Surge in Low-Income Home Ownership

U.S. Treasury Study Links Cryptocurrency Gains to Surge in Low-Income Home Ownership
28 Nov 2024

A recent study by the U.S. Treasury’s Office of Financial [...]

A recent study by the U.S. Treasury’s Office of Financial Research has found a significant correlation between the surge in cryptocurrency investments and an increase in mortgage debt among low-income households in areas with high exposure to digital assets like Bitcoin and Dogecoin.

Data from the study indicate that the mortgage holder rate for low-income households in high-crypto exposure zip codes nearly quadrupled, rising from 4.1% in January 2020 to 15.4% in January 2024. The average balance per mortgage for these households also surged by over 150%, from $171,773 to $443,123 during the same period.

“This indicates that low-income households may be using cryptocurrency gains to take out new mortgages and secure larger loans,” the study stated.

However, the research also highlighted concerns about the financial stability of these households. The average income for this group was reported at $40,664 in January 2024, leading to a mortgage debt-to-income ratio of 0.53—well above the recommended benchmark of 0.36.

“It is particularly concerning because higher debt-to-income ratios are positively correlated with future default rates, especially during periods of turmoil such as the 2008 financial crisis,” the study noted.

Auto Loans and Credit Card Debt Also Affected

The study found similar patterns in auto loan and credit card debt. Low-income households in high-crypto exposure areas saw average auto loan balances increase by 52% between 2020 and 2024, compared to a 38% increase in low-crypto areas. Auto loan holder rates for these households also grew by 5%.

For middle-income households, those in high-crypto exposure areas saw a modest increase in auto loan balances by 3.1%, while those in low-crypto areas experienced an 8.5% decrease.

Credit card debt among low-income households increased significantly, with average balances rising by approximately 46% across all crypto exposure categories. However, the study noted that differences in credit card debt changes across crypto exposure categories were minimal for this income group.

Delinquency Rates Remain Low Despite Increased Leverage

Despite the increased leverage, higher debt levels have not yet resulted in higher delinquency rates among these groups. In fact, delinquency on debt dropped the most among low-income households in high-crypto exposure areas. Mortgage delinquency decreased by 4.2% in these regions, compared to a 3.8% drop in areas with low crypto exposure.

Auto loan delinquency rates among low-income households in high-crypto areas decreased by 6.4%, while they increased slightly in low- and mid-crypto areas. Credit card delinquency rates for low-income households in high-crypto areas increased by 7.5%, which is lower than the 23.7% increase observed in low-crypto areas.

Geographic and Demographic Trends

The study also highlighted the geographic distribution of crypto exposure. High crypto exposure is generally clustered in urban, tech-centric cities on both coasts. Exposure to cryptocurrencies increased across the income distribution, but the most significant increases occurred among high-income earners. High-income households reporting crypto exposures rose from 1.9% in 2020 to 6.4% in 2021.

Crypto exposure declines with age, consistent with the perception that the crypto market is more popular among younger investors. Monitoring younger demographics may be crucial, given that financial distress can be persistent over the life cycle.

Cryptocurrency Market Surge

Between January 2020 and January 2024, the total cryptocurrency market capitalization surged by 737%, from approximately $197 billion to $1.65 trillion. Major cryptocurrencies like Bitcoin saw substantial gains, with Bitcoin’s price increasing by 355% during this period.

An August report disclosed that U.S. consumers are becoming more receptive to cryptocurrencies, with fewer than 1% now dismissing them as a “fad,” marking a significant decline from previous years.

Policy Implications and Future Risks

The Treasury Department’s findings underscore the need for careful monitoring of financial risks associated with increased leverage among low-income households, especially if cryptocurrency markets experience a downturn. Elevated debt levels could pose future risks to financial stability if economic conditions deteriorate.

“An important takeaway for future monitoring is the increased debt balances and leverage among low-income households with crypto exposure,” the study concluded. “Rising distress in this group could cause future financial stress, especially if exposure to these types of high-leverage, high-risk consumers is concentrated in systemically important institutions.”

 


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