Galaxy Exploring the Impact of Large-Scale Wealth Transfer on the Cryptocurrency Market

A Journey Through the Cosmos Investigating the Effects of Significant Wealth Transfers on the Cryptocurrency Market

Author: Charles Yu

Translation: Luccy, BlockBeats

Editor’s note: In the next two decades, the millennial generation will become the primary beneficiaries of wealth inheritance, and by 2030, their adoption or acceptance rate of cryptocurrency will be at least three times higher.

Charles Yu, a researcher at Galaxy Digital, conducted an in-depth analysis of the transfer of wealth in the United States, focusing on the massive wealth transfer from the baby boomer generation to the millennial generation. The shift from traditional financial systems to cryptocurrencies not only reflects the differences in investment behavior and values between the millennial generation and the older generation, but also brings new opportunities and challenges to the cryptocurrency market. The article provides a detailed analysis of the preferences of the younger generation towards cryptocurrencies and the profound impact this trend could have on the market.

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Charles Yu also points out that although “massive wealth transfer” may not solve all the financial problems faced by the younger generation, it marks a transition of power and wealth, providing more autonomy for the digital-native generation.

In the coming decades, the older generation will pass on trillions of dollars in money and assets to their children, which will greatly change the landscape of wealth in the United States. The younger “digital natives” have different investment preferences compared to their parents, including a higher willingness to invest in Bitcoin and cryptocurrencies.

Key Points

The millennial generation is about to experience the largest wealth transfer in history. Although the baby boomer generation and the older generation make up less than one-third of the adult population in the United States, they collectively own two-thirds (96 trillion dollars) of the country’s household wealth, which is more than 11 times the wealth of the millennial generation and younger. Over the next two decades, Cerulli Associates estimates that there will be a wealth transfer of $84.4 trillion from the baby boomer generation and older to the younger generation, with the millennial generation being the primary beneficiaries. Coldwell Banker estimates that by 2030, the wealth of the millennial generation will increase by a factor of 5 compared to the beginning of this decade, mainly due to inheritance.

The millennial generation and Generation Z are noticeably different from the older generation when it comes to cryptocurrencies, as they are more inclined to choose cryptocurrencies. The millennial generation and Generation Z are the first wave of digital natives and, compared to their parents and grandparents, they are more diverse in terms of race, education, and social awareness. Influenced by multiple economic recessions, high housing costs, and heavy debt burdens, these younger generations are more willing to accept alternative financial systems and investments, including cryptocurrencies. Many surveys measuring the adoption of cryptocurrencies among different generations have found that these younger generations have an adoption or acceptance rate of cryptocurrencies at least three times higher than the baby boomer generation.

Transferring wealth to these crypto-friendly individuals could result in a significant increase in demand for Bitcoin and other crypto assets. If a large-scale wealth transfer (The Great Wealth) were to occur today, we estimate that there would be an additional $160 billion to $225 billion flowing into the crypto market, based on the higher acceptance rate of the younger generation compared to the baby boomer generation. As the majority of the baby boomer and older generations’ wealth is expected to be passed down to the younger generation by 2045, our estimates suggest that the impact of wealth transfer could result in a daily increase of $20 million to $28 million in purchasing pressure on the crypto market over the next 20 years.

While wealth transfer may not solve all financial problems for the millennial and younger generations, it is expected to only benefit a small portion of the population through inheritances. The wealth transfer may not flow to the low-income groups who are more likely to benefit from inheritances. For those expecting an inheritance, the actual amount of wealth transferred may be lower than expected due to longer lifespans, higher medical expenses, poor financial planning, shifting expenditure priorities, and fewer benefits.

However, the shift of wealth/power to the younger generation is inevitable, and this is a good sign for cryptocurrencies. Even if a large-scale wealth transfer cannot substantially solve the financial burdens of the millennial generation, the transition from the baby boomer generation to the younger generation will have profound impacts on society and politics – all of which have positive implications for further adoption and future development of cryptocurrencies in the United States.

The Great Wealth Transfer

According to the Federal Reserve’s Survey of Consumer Finances, as of the second quarter of 2023, the total wealth of U.S. households reached $146 trillion. Out of this total, the baby boomer generation and older (born in 1964 or earlier) collectively hold $95.6 trillion, accounting for about two-thirds of the total wealth in the United States, despite being less than one-third of the adult population.

In recent years, the millennial generation has surpassed the baby boomer generation to become the largest generation in the United States. Despite their population advantage, the millennial and younger generations (including Generation Z) collectively hold $8.3 trillion (about 5.7% of total wealth), which is approximately 11.5 times less than the amount held by the baby boomer generation and older, or about 15.5 times less per person.

In the next two decades, the millennial generation is set to be the primary beneficiaries of what many refer to as “The Great Wealth Transfer,” where trillions of dollars of wealth will be passed down to them from the older generation.

Cerulli Associates predicts that by 2045, the total amount of wealth transferred through inheritance will reach $84.4 trillion, with $73.6 trillion (87% of the total) being passed on to heirs, and the remaining $11.9 trillion (13% of the total) being donated to charitable organizations. The Baby Boomer generation (aged 59-77) is expected to transfer $53 trillion (63% of the total transfer amount), while the Silent Generation (currently aged 78 and above) is projected to primarily transfer approximately $16 trillion (19% of the total) within the next decade. Coldwell Banker estimates that by 2030, the wealth held by millennials will be five times higher than it was at the beginning of this decade, primarily due to inherited wealth.

Generational Differences

Recognizing the key differences between these different groups and identifying intergenerational trends provides valuable insights for individuals, investors, businesses, and policy-makers who wish to understand user behavior and preferences, capitalize on market opportunities, or evaluate the impact of policy decisions.

Each generation’s individuals have experienced a series of significant and influential events and challenges throughout their upbringing, which have helped shape their principles and priorities in life. As young adults, the Silent Generation experienced World War II, the Baby Boomer generation went through post-war global conflicts and civil rights and counterculture movements, Generation X witnessed the fall of the Berlin Wall, significant inflation in the 70s and 80s, and the dot-com bubble, while the millennial generation lived through the Great Recession and initiated the Occupy Wall Street movement, and Generation Z has entered the workforce after experiencing the COVID era. These significant events during their formative years have influenced the way we interact with the world, including attitudes towards work and investment preferences.

In the chart above, we have listed several key developments during each generation’s formative period, as well as certain characteristics and values of each group. Most of these generational features and traits are related to the global political and socio-economic conditions of each generation’s upbringing (such as war, capital markets, job markets, housing, etc.), while others may result from technological advancements or other trends beyond the control of central banks and decision-makers (such as increased access to information, technology, and media, globalization).

The millennial and Generation Z stand out as the first generation to come of age alongside the internet, earning them the title of the first “digital natives.” They are more diverse in terms of race, more highly educated, and more socially conscious compared to the older generations. There is also a generational divide between the young and the old. Today, the older generation often perceives the younger generation as lazy, entitled, materialistic, and sensitive. Conversely, the younger generation may view the older generation as out of touch, stubborn, and narrow-minded.

There is no doubt that there is controversy regarding these suggestions and the pros and cons on both sides. However, the millennial and younger generations undeniably have to deal with some unique financial dilemmas and challenges that the previous generations did not experience at a similar age. They not only faced two major economic recessions early on in adulthood but also had to contend with higher education costs (and student loans) and housing costs, which have had an impact on their savings and wealth:

· For millennials and Generation Z, student loan debt is a more severe issue compared to Generation X and the Baby Boomers. Not only have the costs of not attending college continued to rise, but the cost of education has significantly increased, surpassing income growth, leading to an expansion of student loan levels for the younger generation. From 1982 to 2022, the average cost of attending a four-year college rose from $11,840 to $30,031 (a 153% increase in 40 years). During the 15-year period from 2008 to 2022, student loan debt increased by 163%, reaching $1.74 trillion. As of the third quarter of 2023, the number of federal student loan borrowers has increased by 45%, reaching 43.5 million Americans, and the average student loan debt per graduate has increased by 33%, reaching $37,650. Compared to the Baby Boomers at the age of 30, millennials are more likely to have some student loan debt (about 40% compared to around 20%) and face a fourfold economic burden in terms of debt-to-income ratio (40% compared to 10%).

· Housing costs have also become more expensive for the younger generation relative to the baseline (favoring the wealth of the Baby Boomers due to the increase in real estate asset values). In the past 40 years, housing has become increasingly unaffordable as the median price of new homes has exceeded median household income, leading to an expansion of unpaid mortgage debt and slowing down the homeownership rate for millennials compared to the previous generation (further affected by interest rate hikes in the past two years). The homeownership rate for millennials lags behind the older generation: in 2022, only 43% of millennials own their homes at the age of 30, while the Baby Boomers had a homeownership rate of 52% at the same age.

These economic challenges have had a negative impact on the wealth-to-income ratio of millennials, resulting in their ability and inclination to invest or save falling behind that of the Baby Boomers. Higher levels of debt may delay the age at which investments begin and the amount of savings, and they may also impact the risk behavior of the younger generation. Furthermore, traditional sources of retirement income have shifted from Social Security and defined benefit pensions to defined contribution plans (such as 401(k) plans), transferring the burden of savings and investment management onto employees. Millennials will be the first generation to retire without a defined benefit pension plan for the majority, and Social Security may no longer be a reliable source of retirement income. Therefore, according to a survey by the Transamerica Institute, early access to retirement savings, such as loans, early withdrawals, and hardship withdrawals, has become more common among the younger generation. The survey also found that the younger generation is more concerned about their mental health and their ability to save for retirement.

Attitudes and Adoption of Cryptocurrencies Among Different Generations

The traditional financial system served the baby boomer generation well – they enjoyed relatively high incomes, low living costs, and many years of economic prosperity compared to the millennial and younger generations. As a result, studies show that they are more likely to have confidence in the financial system and choose to maintain the status quo.

In contrast, many millennials and younger individuals are disillusioned by the financial system, feeling that it has not catered to their needs as it did for their parents and grandparents. In particular, concerns about inflation and declining trust in institutions since the 2008 financial crisis have led these digitally native groups to be more open to alternative financial systems and investments. Compared to the older generation, they are more likely to use non-traditional digital brokerage apps and robo-advisors, and they have higher investment preferences in technology, ESG, social impact, and alternative investments.

Naturally, the idea of having an alternative financial system that uses digital-native currencies outside the control of banks and governments resonates with this group. The appeal of Bitcoin and cryptocurrencies aligns with the values of the younger generation, offering a digital-first, accessible, permissionless, privacy-focused, and always-online independent personal financial method.

Adoption Rates of Bitcoin/Cryptocurrencies by Generation

Coinbase estimates that 52 million Americans own cryptocurrencies (about one-fifth of adults), with the highest ownership rate among millennials (45%) and Gen Z (39%). The findings are somewhat similar to Pew Research, which found that among adults over 50 years old, 8% have invested, traded, or used cryptocurrencies, compared to 25% among those aged 30-49 and 28% among those aged 18-29, indicating adoption levels three times higher among the younger generation than those over 50 years old.

Other surveys tracking the adoption of cryptocurrencies among different generations have slightly different estimations, but each has arrived at similar findings: the adoption rate of cryptocurrencies among millennials is several times higher than that of the baby boomer generation, averaging 5.0 times in the surveys included in the table below (detailed information and links to each survey are included in the appendix):

Other notable survey results:

– Users of cryptocurrencies tend to be individuals with higher education and financial literacy. An empirical study on cryptocurrency adoption found that “individuals with higher subjective financial literacy are more likely to perceive the benefits of using cryptocurrencies and demonstrate higher intentions to use them.” An Investopedia survey found that 69% of millennials report having an intermediate to advanced understanding of digital currencies, while only 23% of baby boomers do.

– The younger generation, just like stocks, enjoys cryptocurrencies and has a greater allocation in asset categories. The same Investopedia survey found that millennials are more likely to invest in cryptocurrencies (38%) than stocks (37%). A FINRA/CFA survey found that Gen Z investors are most likely to make their first investment in cryptocurrencies (44%) followed by individual stocks (32%) and mutual funds (21%). The FINRA/CFA study also found that the median investment in cryptocurrencies for Gen Z is $1,000, about a quarter of their median total investment holdings, which is $4,000. A BNY Mellon survey discovered that the “next-generation” allocates an average of 5% of their average investment portfolio to cryptocurrencies, compared to just 1% for family offices in North America.

– The stance on cryptocurrencies may be a key topic influencing voter decisions. Millennials and Gen Z adults currently make up around 40% of the voting-age population and will become the majority of U.S. voters by 2028. A Coinbase survey found that 44% of millennials believe politicians and policymakers should support cryptocurrencies/blockchain. Among the 52 million cryptocurrency owners, 55% stated that they would consider voting for a candidate who supports cryptocurrencies in 2024, with millennials being the highest at 78%, surpassing Gen X (71%), Gen Z (69%), and baby boomers (51%).

Therefore, in all these generational surveys, regardless of how it’s framed, millennials and Gen Z are more likely to be supporters of cryptocurrencies than baby boomers. Hence, transferring wealth from the older generation to this crypto-friendly demographic could result in more funds flowing into Bitcoin and the wider range of crypto assets.

The impact of mass wealth transfer on Bitcoin/cryptocurrencies

As of November 27th, 2023, the value of the crypto market is approximately $1.5 trillion. Assuming its distribution is similar to the U.S. proportion in global wealth (31%), we estimate the U.S. crypto market value to be around $465 billion.

If we apply the average crypto adoption rates from the surveys to the population data from the census, we estimate that a total of 51 million Americans own cryptocurrencies (matching Coinbase’s estimate of 52 million), with baby boomers and the older generation constituting about 10% of the U.S. crypto population (while Gen X makes up 27% and millennials and below make up 63%). Assuming an even distribution of the estimated $465 billion U.S. crypto wealth, we estimate that baby boomers and the older generation currently hold around $45 billion in crypto wealth.

If the Great Wealth Transfer were to happen today, we estimate an additional $160 to $225 billion would flow into the cryptocurrency market, as younger generations embrace the crypto space. This assumption is based on the younger generation having 3.5 to 5 times higher adoption rates compared to the Baby Boomer generation (using the average value based on survey data, with a minimum range of 3.5 times the X Generation/Boomer ratio and a maximum of 5 times the Millennial generation multiple). This translates to the younger generation holding 3.5 to 5 times more crypto wealth than the Baby Boomers currently hold.

Since most of the wealth held by the Baby Boomer and older generations is expected to be passed on to younger generations by 2045, our estimates indicate that the impact of wealth transfer could bring an additional $2 to $28 million in daily buying pressure to the crypto market over the next 20 years.

It’s worth noting that this approach may underestimate the impact of wealth transfer on the cryptocurrency market, as it uses rough estimates of crypto wealth held by the Baby Boomer generation as a benchmark, which essentially assumes that while crypto adoption rates increase, the tendency to invest in crypto assets remains constant. Conversely, a more likely scenario is that there will be an additional multiplier effect due to the fact that the Millennial and younger generations typically allocate a larger proportion of investable wealth to crypto assets rather than traditional financial assets, including stocks and bonds.

This approach is also conservative as it takes a static perspective on today’s crypto preferences and wealth potential, without considering the higher income potential of the younger generation today, nor does it account for the compounding growth effect of investment returns over time. With the continuous development of infrastructure, application layers, and the proven potential benefits of the technology over time, crypto acceptance and adoption rates are expected to continue growing.

Expectations for the Financial Impact of Massive Wealth Transfer Are Moderated

While some economists estimate that wealth transfer could increase the overall wealth of the Millennial generation by 5-10 times, which could significantly improve the financial well-being of the younger generation in economic hardships and trigger (crypto) prosperity, there are several reasons to believe that the impact of wealth transfer may be much smaller:

· It is expected that a majority of the wealth to be transferred is held by a small number of wealthy families. If the total wealth held by the baby boomer generation and older generations is transferred to the remaining approximately 250 million Americans, each person would receive around $380,000, which could easily solve all existing debts for the younger generation. However, wealth transfer will not be evenly distributed – Cerulli estimates that 42% (3.58 trillion dollars) of the total transfer will come from high-net-worth and ultra-high-net-worth families, which together only account for 1.5% of all households. A study conducted by the University of Pennsylvania on historical inheritances found that the amount inherited by the top 5% of households was 4 to 12 times that of the bottom 80% of households. In addition, the probability of receiving an inheritance in any given five-year period is only 7.4%, but this probability increases among higher-income groups.

· For those expecting to inherit, the actual wealth inherited may be lower than their expectations. A study by the Federal Reserve found that people who received inheritances in the past three years estimated that they would receive an average of $72,200 (actually receiving an average of $46,200), highlighting the gap between expected and actual inherited wealth. This gap is even more significant for the bottom 50% of the wealth population, as they estimated to receive an average of $29,400 (actually receiving an average of $9,700). In terms of “massive wealth transfer”, a survey by Allianz Credit Union found that 52% of millennials expecting to inherit expressed expectations of inheriting at least $350,000, while 55% of baby boomers planning to leave an inheritance said they would pass down less than $250,000.

· With longer lifespans and reduced pensions/welfare, the baby boomer generation is spending more on themselves. A study by Fidelity found that retired couples aged 65 can expect to pay $300,000 in medical and healthcare expenses during retirement (an 88% increase since 2002). A study by Coventry found that 85% of retirees prioritize their own financial security and health, and over 75% of surveyed retirees plan not to leave any inheritance.

· Previous intergenerational wealth transfer events in history have led to greater wealth inequality. A research report by the Bureau of Labor Statistics (BLS) on previous intergenerational wealth transfer events (tracking inheritances from 1989 to 2007) found little evidence of a surge in inheritances – the average proportion of inheritances and gifts in net assets was 19%, continuing a declining trend, indicating that over time, inheritances and gifts make up a smaller proportion of family wealth accumulation.

Therefore, any millennial generation that expects wealth transfer to immediately bring economic prosperity to repay all debts should moderate their expectations and make other preparations. Most of the wealth inherited from the older generation is unlikely to flow to the low-income groups that need it the most. However, any inheritance amount can still improve an individual’s financial status and provide greater investment capacity, with Bitcoin and other cryptocurrencies potentially being the primary beneficiaries.

Outlook

The Baby Boomer generation experienced a booming economic growth after World War II, profoundly changing the entire American society. However, they have stark intergenerational differences with the millennial generation and younger generations, who face greater economic pressures than their older counterparts. Besides the massive wealth gap, the social values ​​of the digital native generation are also sharply different, particularly in terms of acceptance of technology, social awareness, and trust in institutions. This makes these groups more willing to embrace alternative financial systems such as Bitcoin and cryptocurrencies.

As the last batch of the Baby Boomer generation enters retirement, the millennial generation will become the primary beneficiaries of the “massive wealth transfer” process, which will pass on nearly $100 trillion in wealth through inheritance from the older generation. Although the “massive wealth transfer” may not solve all the escalating debt problems faced by the younger generation, it represents a substantive demographic change that will amplify the stronger crypto inclination of the digital native population. Over time and as people age, cryptocurrencies may experience more inflows of funds and find a more widely adopted and supported path.

Appendix: Survey Data

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