Any Link Between Cash Holdings and Bitcoin Ownership?
The Bank of Canada (BOC) has issued a paper investigating the relationship of Bitcoin owners with cash 1.
The paper is written in the context of understanding whether private digital currencies will make serious inroads into the use of cash, particularly for transactions. This is one of two criteria given in a speech in February 2020 by the Deputy Governor when considering potential reasons to issue a Central Bank Digital Currency (CBDC). The other was if cash demand falls to negligible levels.
In Canada cash usage for transactions has fallen, but is holding up strongly in some demographics and for some transactions. Canada has a very similar payment infrastructure to Sweden, yet Canada’s cash usage cannot be described as negligible while Sweden’s can. This paper cited different legal status of notes and banking regulations relating to secure deposits in the two countries.
Two key considerations relevant to assessing whether the Deputy Governor’s criteria for a CBDC will be met were reviewed.
First, the role of consumer preferences driving the demand for cash and alternatives. What characteristics of cash do consumers value and can they be translated into a digital format? The characteristics that are important for person-to-person payments may not be relevant in the case of online payments – speed, convenience etc.
Huynh et al (2020) estimated that CBDCs could account for 25% of payments, displacing cash and debit cards. To do this CBDCs would need to combine the best elements of cash and debit cards and be widely accepted by merchants.
Second digital currencies need to be effective for both transactions and as a store of value.
Finding of the BTCOS
To consider these questions the BOC used data from its Bitcoin Omnibus Survey (BTCOS). BOC first ran this survey in 2016 and has run it every year since. This study just used the data from 2017 and 2018, a time when Bitcoin first rose in prominence as its price rose sharply in 2017 and then remained prominent as it fell sharply in 2018, reaching a low plateau in 2019. BTCOS asks Canadian consumers about their cash holdings.
The survey found that Bitcoin owners tend to hold more cash both as a mean and a median relative to non-Bitcoin owners. The difference was significant, being up to three times more. The difference in cash holdings at the 25th quantile was 63% in 2017 but fell to 39% in 2018. At the 95th quantile it rose from 176% in 2017 to 203% in 2018. The mean effect varies by 95% in 2017 and 82% in 2018.
The paper drew the conclusion that the adoption of cryptocurrency may not necessarily lead to a reduction in the demand for cash.
Observations
The profile of people who held Bitcoin changed between 2017 and 2018. The household income and education level of Bitcoin owners both rose, although they continued to have lower levels of financial literacy than average. Although the differences reduced, Bitcoin owners still held more cash than non-owners. 5% of Canadians own Bitcoin.
This paper, and a number of other studies that it refers to, seeks to explain why Bitcoin owners hold more cash. Perhaps they inherently have a greater preference for anonymity around payments? Do they have a lower level of trust in government institutions and banks? Is holding cash an attempt to hedge against holding higher risk assets such as Bitcoin? While only half of people who hold Bitcoin have actually used it to pay for something today, do they believe that in the future it will be easier/they will be more likely to pay using Bitcoin? In which case they are holding Bitcoin based on their belief about the future.
Final word
The authors found some evidence to reject the hypothesis that new digital currencies or technologies, such as Bitcoin, will lead to a decline in cash holdings.
Earlier the paper suggested to achieve 25% market share, a CBDC or cryptocurrency would need to combine the strengths of cash and debit cards, and be widely accepted by merchants. It would appear that they aren’t perceived to currently and that decisions about how much cash to hold are difficult to understand.
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