Bitcoin’s price rise in 2017 has been stunning. For an asset linked to no tangible value, the increase in price from $998 on January 1 2017 to hitting a high of $19,497 on December 16 was more than just eye-popping. It created a tangible bitcoin effect on economic growth that, at least in Japan, translates into an impact on quarterly gross domestic product growth “that cannot be ignored,” according to a Nomura report. This is particularly true in Japan, where much of the bitcoin ownership is centered.

Bitcoin effect: Second half of 2017, where most bitcoin gains occurred, primarily benefited Japanese citizens

There is a “wealth effect” thesis that Nomura researchers Yoshiyuki Suimon and Kazuki Miyamoto cite when pointing to increased Japanese GDP in the first quarter of 2018. Working on the assumption that an increase of ¥10 billion in wealth (asset value) boosts personal consumption by ¥0.2 to ¥0.4 billion, the pair expects the rise of bitcoin to result in a tangible economic impact on the island nation.

Japan is particularly exposed to the bitcoin effect. A December 14 Deutsche Bank report, looking at the amount of bitcoin trading in yen, said it was Japanese currency speculators that were primarily “holding up” the price of bitcoin. A December 11 Nikkei report had earlier pointed to 40% of cryptocurrency trading being denominated in yen.

In their December 29 report, Nomura’s Suimon and Miyamoto take a more nuanced approach, first noting the trend of increased Japanese speculation. Since the April 2017 Payment Services Act went into effect in Japan, essentially allowing cryptocurrency trading, yen-based trading has taken off.

Early in 2017, the Chinese Yuan dominated cryptocurrency trading. But when the Chinese government clampdown on such speculation, bringing it to a near halt, the Japanese have picked up the action. It is the second half of 2017 where the primary gains made through the bitcoin effect were witnessed – right in the Japanese wheelhouse.

Bitcoin effect: Japanese GDP expected to grow by 0.3% in the first quarter of 2018

In the second quarter of 2017, in the second quarter of 2017, the bitcoin’s overall market cap stood at just over ¥2 trillion, with Japanese ownership lagging. By the fourth quarter, bitcoin’s market cap had swelled to over ¥12 trillion.

Nomura estimates that Japanese citizens currently hold ¥5.1 trillion in bitcoin. Nomura explains the math:

Bitcoin circulating supply was around 16.22mn coins in Apr-Jun 2017, and multiplying that by the 22.8% share of yen trading at the time gives roughly 3.7mn Bitcoin held on a yen basis. Although the share of yen trades rose after that, we estimate that this was due in part to overseas investors moving in as a result of the cryptocurrency clampdown by the Chinese government, and in our estimates below we assume 3.7mn Bitcoin held by Japanese people. According to a 27 December 2017 Nikkei article, the number of Japanese people holding Bitcoin has reached 1mn, and assuming average holdings of 3-4 Bitcoin per person, this is broadly consistent with our estimate.

This increase in paper wealth is expected to result in tangible GDP spending that will be seen in the Japanese economy.

While unrealized gains are “unlikely to feed straight through” to the economy, Nomura nonetheless estimates that the bitcoin wealth effect in the nation is expected to drive ¥96 billion in personal consumption.

With Japanese GDP estimated near ¥522 trillion, that works out to a small 0.07% of GDP. But what is important to factor is the recency effect.  Taking into account most of the rise in bitcoin’s price occurred in the fourth quarter of 2017, Nomura estimates that the impact will mostly be felt in the first quarter of 2018 – resulting in a hard to ignore 0.3% impact on GDP.

There are two primary methods the rise in bitcoin and cryptocurrencies can contribute to GDP growth, noted Finance Professor Geoffrey Smith, W. P. Carey School of Business at Arizona State University. “The extent to which a cryptocurrency contributes to making transactions easier, more cost-effective and transparent is one way GDP growth might be affected,” he told ValueWalk. “The extent to which people feel more optimistic resulting from unrealized gains in the value of bitcoin is also a potential contributor to GDP growth.”

Bitcoin Effect and volatility impact on Japanese growth

Nomura considers the impact of bitcoin price volatility on its analysis, and notes the nuanced effect:

“To what extent major Bitcoin holders who have increased their assets through the end of the year will bolster consumer spending through the beginning of year remains to be seen, but we should keep in mind the possibility that spending will exceed expectations as a result of this factor.”

In other words, investment gains made on an asset without a clear tangible value might be spent in the economy more rapidly than anticipated.

Smith, for his part, sees cryptocurrencies offering personalized benefits. “Cryptocurrencies are going to offer different benefits for different people. Some like the institutional backing and may gravitate to a utility coin offered by the major banks while others might value the ability to transfer money from one geographic region to the next efficiently.”