We exploit the May–December 2021 Bitcoin crash to study how large, negative wealth shocks in crypto markets propagate through
the balance-sheet choices of U.S. households. Linking anonymized brokerage and depository records to a nationally representative
panel of 2.3 million households, we show that the median crypto-exposed household lost 48 % of its liquid net-worth when Bitcoin fell
from $63 k to $33 k. The crash triggered an immediate and persistent reallocation of portfolio shares that traditional frictionless
models fail to explain. Within six weeks, households reduced their aggregate crypto weight from 14 % to 6 %, but—critically—did not
return the proceeds to cash or index funds. Instead, they (i) increased margin borrowing against equity positions by 18 %; (ii) shifted
toward high-beta tech equities and call-option strategies; and (iii) doubled allocations to leveraged ETPs that offer synthetic crypto
exposure.
Using a difference-in-differences design that contrasts counties in the top and bottom terciles of pre-crash crypto wealth, we
document real-side spillovers: zip codes with high crypto penetration experienced a 9 % relative decline in auto-loan origination and
a 4 % rise in 30-day credit-card delinquencies over the following nine months. Heterogeneity analyses reveal that the reallocation
was strongest among households with low traditional-asset wealth and high leverage, suggesting that crypto losses were treated as
disposable risk capital rather than as part of a diversified nest egg. Finally, survey evidence indicates that the crash revised
subjective return expectations downward by 30 percentage points, yet left beliefs about crypto’s long-run upside intact—implying that
the observed portfolio changes reflect a risk-budgeting response rather than a permanent exit from digital assets.
Our results imply that the microstructure of household portfolios now contains a crypto-feedback channel: negative shocks to the
riskiest asset class are amplified by simultaneous increases in leverage and factor-tilt exposures elsewhere in the balance sheet,
raising the elasticity of household consumption to future crypto volatility.