Fed Report Shows Who's Actually Using Crypto and How

Millions of lower-income or unbanked people are more likely to use cryptocurrency as a payment method.

Who actually uses cryptocurrency, and why? A new report from the Federal Reserve shows that for some, digital currencies like bitcoin can be a real alternative for those who lack financial access. Although crypto schemes and spectacular busts get a lot of attention, peer-to-peer digital money has transactional use for the unbanked.

Every year, the Fed puts out a publication called the Survey of Household Economics and Decisionmaking. Since 2013, it has collected survey responses from American families about their finances, job situations, and abilities to cover unexpected expenses.

The report for 2021, "Economic Well-Being of U.S. Households in 2021," was just released in May. For the first time, the Fed included questions about cryptocurrency in the survey. The responses from the 11,874 participants of all ages, incomes, ethnicities, and educational levels show that depending on your state of life, you might be using digital currency in very different ways.

The new data on cryptocurrency usage is on page 46 of the report. First, it finds that 12 percent of participants, a little over 1,400, held or used cryptocurrency at some point over the previous year. If that extrapolates to the general American population, that suggests that almost 40 million Americans were involved in cryptocurrency last year.

This is in line with other estimates of American cryptocurrency usage; in 2021, for instance, the Pew Research Center reported that around 16 percent of Americans, or 53 million, had ever bought or held cryptocurrency. That these two estimates are so close suggests that Americans may be becoming more comfortable with cryptocurrency, since the Fed report only examined activities over the previous year.

The new Federal Reserve report is helpful because it breaks down the groups who have either invested in cryptocurrency—that is, bought it to hold and trade for a profit—versus those who use the cryptocurrency for transactions—as a digital cash. It furthers dissects those groups out by income and banking level.

Most of the participants who said they used cryptocurrency in 2021 did so as an investment. Some 11 percent of the survey participants reported such, then three percent reported using it as a payment mechanism. Two percent said they used cryptocurrency to purchase goods or services, while another one percent said they used it to send money to friends and family. Note that these numbers overlap—some people who used bitcoin as an investment also used it to transact.

One and two percent doesn't sound like a lot. But when you extrapolate it out to the general American population, you get a decent crowd of people. If this survey is roughly representative, that means that more than six million Americans may have used cryptocurrency as a payment method last year.

What's interesting is that users who transacted using cryptocurrency tended to be lower income. Sixty percent of people who used cryptocurrency for transactions had annual incomes lower than $50,000.

Furthermore, people who used cryptocurrency for transactions were more likely to be unbanked than those who did not use cryptocurrency at all. Thirteen percent of transactional cryptocurrency users lacked a bank account, compared to six percent of people who did not use cryptocurrency, while 27 percent of cryptocurrency transactors did not have any credit cards, compared to 17 percent of non-users.

We can also get insights from the profile of people who used cryptocurrency for investments. These respondents were less likely to be unbanked (1 percent), lack credit cards (7 percent), or lack retirement savings (11 percent) compared to both transactional cryptocurrency users (13, 27, and 29 percent) and non-cryptocurrency users (6, 17, and 27 percent). Relative to these other groups, people who see cryptocurrency as an investment vehicle have more financial access and perhaps more financial acumen. Almost half of these people had an income of at least $100,000.

For context, 5.4 percent of U.S. households are unbanked, according to the FDIC. Depending on the size of each household, we could be talking anywhere from 12 to 18 million American adults. If six million or so people are becoming more accustomed to cryptocurrency transactions each year, this could fertilize the roots of a real alternative for financial access for many households.

We shouldn't get ahead of ourselves. Someone reporting that they used Dogecoin one time to pay for something does not mean that person is a bankless sovereign individual. And most of the people who used cryptocurrency for transactions did have bank accounts. The vast majority of unbanked people do not use cryptocurrency. There's a lot of work to be done in expanding cryptocurrency adoption and ease of onboarding so that things like cheap bitcoin payments become a real everyday alternative for transactions.

But this survey does show that people who use cryptocurrency for transactions are more likely to be unbanked or lack access to credit cards. Cryptocurrency users who are higher income, on the other hand, are more likely to see it as an asset or investment.

What are the policy implications? For one, the survey helps give us a more nuanced view of cryptocurrency users. If you only listened to critics, you might think cryptocurrency is just a high-tech value shredder.

This report shows that different people use cryptocurrency for different reasons. Those who primarily invest in cryptocurrency tend to be higher income with better financial access. This doesn't mean that they are savvy investors, but they are at least more likely to have above average financial sophistication.

Those who primarily transact in cryptocurrency, on the other hand, tend to be lower income and have less access to financial services than cryptocurrency investors and non-users alike.

Policymakers should take care that their ideas to protect (or punish) one of these groups does not inadvertently hurt (or encourage) the others.

It will be interesting to see how the responses to these cryptocurrency questions change over time. Ideally the Federal Reserve will refine their methods going forward. For instance, it would be nice to distinguish between "trading"—short-term price speculations—and long-term investments, or people who hold cryptocurrencies like bitcoin in a similar way to commodities like gold. This would shed even more light on the distinctions between riskier financial strategies (the "crypto casino") and lower time preference investing, often called "hodling."

It will also be interesting to see how cryptocurrency usage will change in the 2023 report, which will look at user behavior during 2022, the year that inflation became a household name. I would expect more people to view cryptocurrencies like bitcoin as a safe haven asset like gold, but we will have to see.

Either way, having more empirical data on real cryptocurrency usage is always welcome. It helps us to get a better picture of reality so we can separate it from common hyperbole from both supporters and detractors. Let's hope that more financial regulators start to incorporate robust data-driven considerations when they are crafting cryptocurrency policy.