These 4 Charts on Households' Finances Explain Bitcoin's Lull

• The disposable income of U.S. households is depleting fast, according to key indicators tracked by investment banks.
• Lower disposable income or money available after adjusting taxes means lower consumption and investment in risk assets, including cryptocurrencies.

"2023 is boring," asset management firm Arca's Chief Investment Officer Jeff Dorman recently said, referring to the crypto market lull.

This is absolutely true. 2023 has been characterized by prolonged periods of low volatility in BTC$106,764.94 and other cryptocurrencies and limited episodes of price turbulence, in stark contrast to the previous three years, when there was a dearth of sideways trading. Besides, bitcoin's year-to-date gain of over 50% has failed to spur activity, as evident by the steady downtrend in trading volumes and market depth.

Households' dwindling disposable income likely explains the situation, aside from regulatory hurdles and the absence of cheap liquidity that greased the start-up ecosystem in the past three years.

Risk assets like stocks and cryptocurrencies suffer when disposable income drops, with the latter being more sensitive, like the art market. A household's willingness to take risks in matters of investment and overall spending is inversely related to the level of disposable income or the money available after expenditure and taxes.

The following charts explain the worsening household finances.

Households' excess liquidity

The chart shows U.S. households' liquid holdings in billions of dollars, the historical trend in holdings adjusted for inflation and forecasts for liquid holdings.

The liquid holdings surged after the coronavirus-induced crash of March 2020 and peaked sometime in early January 2022. Bitcoin rallied over six-fold to $69,000 in 18 months following the March 2020 crash and fell into a brutal bear market as liquid holdings peaked.

Per JPMorgan, the disposable income, which currently stands at $1.4 trillion, is being run down by around $100 billion per month and could be fully depleted by May 2024, meaning the highly-anticipated crypto bull market may remain elusive for some time. The Federal Reserve Beige Book released last week highlighted "reports suggesting consumers may have exhausted their savings and are relying more on borrowing to support spending".

Data tracked by the Organization for Economic Co-operation and Development (OECD) show the U.S. led the percentage decline in household disposable income in major economies last year.

Consumer interest expense

The non-mortgage interest expense as a percentage of wages and salaries earned by U.S. households has surged from roughly 2.2% to over 4.2%, according to data tracked by BEA, GlobalData. TS Lombard.

Higher interest payments reduce disposable income, weighing over consumption and allocation to risk assets.

"This level is now at its highest since the Great Financial Crisis and is in line with previous recessionary levels. Despite higher interest rates continuing to take their grip on the American economy and consumers, the market looks ahead to the distinct possibility of higher interest rates to come," Blockware Solutions said in a weekly note on Friday.

Delinquency rates

Delinquency rates on card card loans and consumer loans have jumped to the highest since 2012 and 2020, respectively, according to charting platform TradingView.

In other words, U.S. citizens are falling behind on their credit card and consumer loans. Per the latest data from the Federal Reserve Bank of New York, the total credit card balance in the second quarter of this year was $1.3 trillion, the highest since the central bank began tracking the data in 1999.

The mounting pile of debt bills means less disposable income and low interest in investing in digital assets. Economic theory suggests that uninsurable income risk and the expectation of future borrowing constrains can reduce the share of risky assets in a household's portfolio, according to an article written by Luigi Guiso, Tullio Jappelli and Daniele Terlizzese in the American Economic Review.

Blame the Fed and inflation

Households' worsening financial health is not surprising, as higher interest rates and inflation mean consumers are paying inflated prices for basic needs and paying more to cover the cost of borrowing.

The Fed has raised rates by over 500 basis points since March 2022 and is likely to keep the benchmark borrowing cost elevated for longer. The central bank and its global peers poured trillions of dollars into the system after March 2020, triggering risk-taking in all corners of the financial market.

The data due Wednesday is expected to show that the U.S. Consumer Price Index (CPI) jumped 0.6% in August, or triple the pace of July's 0.2%. On a year-over-year basis, the CPI is forecast to have grown 3.6% versus following July's 3.2%.

9:13 UTC: Adds a quote from the American Economic Review.