Photo by mauro mora on Unsplash
Introduction
One of the ways of analyzing economies is to use demographics, the composition of the population in a market. For instance, the migration of people from farms to cities changes an economy from an agrarian to a manufacturing economy. This is a well known demographic change that increases economic activity overall and therefore changes the people’s economic demographics. Banks increase the money supply to ensure that there’s sufficient money supply to support the new economic activity.
Most economic influencers and media outlets have pointed out how many of the world economy’s demographics are becoming upside down triangles, i.e. there’s more older people than young people. This is usually due to the decrease in birth rate that is below the replacement rate (2.1), the rate required to replace the current population. That is, the number of babies born is less than deaths. This usually occurs when the aforementioned migration to cities is complete. As people live in cities, people tend to marry later, have children later and have fewer children. After 2–3 generations, the older generation’s population is larger than the younger generation, causing an upside down pyramid. This phenomenon is exacerbated by public policies that attempt to mitigate overpopulation, such as China’s one child policy and South Korea’s campaign for two children per family.
The generation born after World War 2, the baby boomers, are currently retiring from the workforce. Every generation’s population since then has been equal or slightly smaller. In some countries such as China and South Korea, there has been a significant decrease in birth rate such that the peak population is happening now. This trend of flat or decreasing birth rate has been happening in most of the large economies and not just in the US. This means that GDP for the country would be flat or decrease as there’s less people to make things and less people to consume those things. Let’s look at how the changing demographics might impact the crypto market.
Disclaimer: This is not financial advice. Just one person’s opinion.
Changing Demographics
Demographics is the statistical characteristics of a population. Businesses use demographics to identify where to place their stores, what goods they should stock in their stores and whom to market those goods. In other words, what economic activities occur in a particular region. The baby boomers, a demographic group retiring, might change how this generation participates in the market. For instance, as the baby boomers retire, many of the services that retirees use will see an increase in demand. For instance, many retirees tend to be at risk of more medical conditions that require medical products and services. Another major economic activity is housing. Many retirees are empty nesters and therefore do not own large homes. Instead, they tend to downsize to reduce costs. As the baby boomers pass away, I would expect a decrease in demand for medical products and services, and single family houses as the number of retirees decreases. This is a secular trend unless there’s a reversal in demographics in the future. However, the economic story isn’t simple as the medical and housing sector will peak in the coming years and then decline. This logic assumes that the amount of medical products and services per person is the same across generations or there won’t be an increase in immigration or productivity increase with automation. Let’s look at a demographics perspective for new technologies.
Adaptation as Demographic Change
One way of applying demographics is the rate of adaptation, a well known method of gauging the potential of new technologies. In the past, this has been applied to the internet, mobile phones, cloud computing and crypto. From a demographics point of view, the adaptation just means that the number of people that are buying and using the technology is increasing. Demographics also tells us what the total market might be if the technology is close to full adaptation. This is how some analysts calculate the total potential market or what the market might be in the future. For instance, certain people with a particular range of income can afford to purchase the said product. If there’s more financial products available to increase the number of people that can purchase the product, then the demographics of the customers will change.
Another typical pattern is that once a particular technology is close to saturation, then other technologies are built on top of the saturated technology. In many cases, multiple technologies can be combined to create new techniques, services or products. For example, the internet technology saturation with miniaturization of computers helped to create smart phones. These two factors also made cloud computing that addressed the needs of internet companies providing services and products to consumers.
Crypto Demographics
As outlined above, demographics can tell us some interesting things about a market. So then, what can demographics tells us about the crypto market in particular? First, we can talk about the theoretical max of the crypto market. If we think of crypto as money, then saturation of crypto would be the supply of money. According to the Federal Reserve Bank of the United States, the supply of money is $21 trillion as of May 2022, compared to the $1.2 trillion valuation of the crypto market as of April 2023. If everyone using the US Dollar changed over to using crypto instead, you could argue that the crypto market could become $21 trillion, a 17.5x increase in valuation. This would be a simple theoretical max for crypto if it was used for money.
Next, crypto is sometimes referred to as a store of value like precious metals such as gold or collectables such as fine art. As of April 2023, the total market cap of gold is $13.3 trillion. If everyone on the planet decided to use crypto instead of gold, then theoretically crypto’s market cap could increase by $13.3 trillion, a 11x increase. As you can see, you can keep on doing this exercise and theorize that the crypto market would increase by 10x or more. This helps us to understand why claims of going to the moon are not that absurd.
Well, what would be some useful application of demographics for identifying trends in the crypto market? First, there’s a higher percentage of adoption of new technologies by the younger generation. This means that the percentage of people using crypto will increase as the older generation shrinks. We haven’t hit that saturation percentage yet. Next, as the baby boomer generation passes away, their wealth is transferred over to the younger generation. This would mean that there would be more wealth will be in the hands of the people that are more likely to invest in crypto, thus increasing their demand. Lastly, the demand for physical goods will probably shrink. As the population decreases with later formation of smaller families in wealthier countries, we would expect a decrease in aggregate demand for food, cars, and housing. These are trends that have been happening for several generations and continue to happen for generations to come.
Conclusions
To take a demographic perspective on the crypto market means being aware of the changes that economies, countries and people go through over generations. By looking at demographic factors such as rate of birth, population size of generations, rate of technology adaptation, and market cap of different assets, we can identify secular trends that shape markets. The current demographic trends indicate that adaptation of crypto will continue to increase for decades to come and more of the wealth to be transferred to those that are more likely to invest in crypto.
References
