Luxury items such as works of art and jewelry are often in demand with rising prices. Is this Bitcoin?

Bitcoin price can go up and down thousands of dollars in an hour. For smaller projects, this can happen in a matter of seconds. But despite the notorious volatility of the cryptocurrency, demand seems to be developing more slowly.

While many analysts make price predictions in different ways, there is a significantly smaller group who look at Bitcoin from a behavioral economics perspective. In particular, they watch the sentiment surrounding Bitcoin when the price rises.

Will demand increase as Bitcoin price rises? And more importantly, will Bitcoin’s appeal fade if its price goes down? In this article we will examine whether Bitcoin has become what economists call a Veblen commodity or a Giffen commodity.

Were Veblen or Giffen?

A Veblen item is usually a luxury item, and the demand for that item increases as the price of that item rises. For example a priceless work of art or a luxury car brand: as prices rise, so does demand.

This phenomenon was discovered by the American economist Thorstein Veblen first coined in 1899 to show how some products and goods are consumed very differently than others.

Demand curve Fuzz | source: Wikipedia.

According to the economist who coined this concept, Veblen goods have a rising demand curve, meaning that when the price rises, so does the demand. This is in contrast to more conventional goods. Ordinary raw materials such as food or everyday goods often follow the opposite pattern: if prices rise, demand falls.

However, Veblen merchandise is generally a high quality, high demand product, and owning it means improving your status in the eyes of your peers. As a result, people with lower incomes mimic the purchase, creating a “racing effect”.

Finally, the scholar Richard Elliot did Arguments In his article on addiction, “affluent consumers can be attracted to external factors such as rarity, celebrity representation, and brand reputation”.

In the meantime, Giffen goods also work in a similar way, but are common and widely used goods or products. The reason why Giffen goods rise in price as demand increases is because these goods are often difficult-to-replace staple foods such as rice or coffee. Which of these two groups does Bitcoin, a Veblen or a Giffen product belong to?

Bitcoin: A story of two raw materials

Bitcoin stands on both sides of the demand curve: it is both a desirable and an undesirable good.

Bitcoin in the both sides of the demand curve | source: Economicshelp.org

Throughout Bitcoin’s history, its trading volume (to be used as an indicator of demand) never exceeded $ 100 million per day in the first 7 years of its existence, despite its steadily increasing price. The same trend followed after the Bitcoin crash in 2018. Although the Bitcoin price had reached USD 20,000 at that point, the trading volume continued to decline despite the massive media attention that went with it.

Bitcoin: Low demand, low price | source: CoinMarketCap

If we move on to the most recent Bull Run in late 2020 – early 2021, we will have a completely different story. On March 18, 2020, Bitcoin fell well below $ 5,000 and the trading volume was around $ 37 billion. When the price of Bitcoin goes up, so does its volume.

In January of this year, the 24-hour trading volume topped $ 100 billion and stayed high in the $ 80 billion range for the next several weeks. When cross-referencing the Fear and Greed Index, we can see that the inflow of money into Bitcoin has shown enormous buying pressure.

Fear and Greed Index | source: alternative.me

According to behavioral economists, when the price goes up, a Veblen item is perceived as being of higher quality and therefore the higher price is justified. In addition, the Veblen product is a coveted status symbol by wealthy consumers who demand a high price for the use of the product.

How Bitcoin was discussed during this period was written by Mark Cuban Call are “financial creeds” and several other high net worth individuals advocate the usefulness of buying Bitcoin. It offers better returns than any other asset class and creates a “better product” feel.

In addition, the number of people who want to participate in the crypto space is also increasing. According to a Gemini poll, about 63% of US adults became “crypto-curious” during the last bull run.

We can also see that social activity appears to be strongly correlated with the rise in prices. Lunar Crush, a sentiment analysis tool, has escalated the number of Bitcoin discussions during this time.

Bitcoin mentions on social networks | source: Lunarrush

So is Bitcoin a Veblen or Giffen commodity? It would be difficult to classify Bitcoin in the Giffen category unless it is directly compared to other cryptocurrencies. Bitcoin is by far the easiest cryptocurrency to buy and it can be argued that it is the only cryptocurrency that is understood by the public, so it is not easy to exchange it for anything else.

However, the rising cost of buying Bitcoin, coupled with the high exposure of the rich to Bitcoin, will make it seem like an unnecessary luxury item for everyday use. As Elliot previously argued, “affluent consumers can be drawn to superficial factors such as rarity, celebrity representation, and brand reputation.”

Has Bitcoin’s aura waned at all since the market crash in May? The question is answered by the volume on the exchange. The volume of cash transactions decreased and market sentiment turned into a state of “fear”.

But do people still talk about it? According to Lunar Crush, the discussion about Bitcoin is more than ever. With the altcoin season in full swing, are there any competitors in the broader crypto space that match the Veblen commodities? Thanks to its role as a platform for the NFT (non-fungible token) and a number of upgrades over the course of this year, ETH resembles the recent popularity with the Veblen wealthy. Can Bitcoin Finally Keep Up To Be The Most Coveted Cryptocurrency Of All?

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