by Jamie Holmes
The rise of bitcoin and cryptocurrency over the course of 2017 has had some pretty strange effects filtering through to wider markets. Most notably, the Long Island Ice Tea company changing their name to Long Blockchain, which resulted in the company’s stock price to soar 289 percent. While we can point to many adverse effects, Nomura reckons the bitcoin ‘wealth effect’ will actually contribute to economic activity in Japan.
The wealth effect is considered by policymakers to be an important channel of influencing economic activity. When stocks, house prices and other assets increase in value, a consumer feels relatively better off and is suggested to spend more as an impulse response. Other asset owners will also feel richer and hence their consumption habits might begin to reflect their newfound wealth. As spending rises, this lines the pockets of businesses they choose to spend their money with, stimulating economic activity, as they use greater profits to consume more themselves, expand and hire more employees or invest in R&D.
With the price of bitcoin and other cryptoassets showing phenomenal gains in 2017, the windfall from many Japanese crypto-traders, which account for a large proportion of the market share, is likely to stimulate consumer spending in the first quarter of 2018, according to investment bank Nomura:
“We estimate the wealth effect from unrealized gains on bitcoin trading by Japanese investors since the start of fiscal year 2017, and estimate a potential boost to consumer spending of 23.2 to 96.0 billion yen ($206.0 million to $852.5 million).”
Because a larger percentage of the price gains were experienced toward the final quarter of 2017, Nomura estimates the wealth effect will be noticeable, raising real gross domestic product (GDP) by around 0.3 percent:
“…the fact that the rise in bitcoin prices was concentrated in 2017 fourth quarter could result in the wealth effect materializing in 2018 first quarter… we estimate a potential boost to real GDP growth on an annualized quarter over quarter basis of up to about 0.3 percentage points.”
The large unrealized profits of many investors in Japan are expected to impact consumer spending significantly. Given that Japanese investors make up a large chunk of the retail traders in forex markets, trading cryptocurrency has been well received and enjoyed rising popularity.