For most products and services, there is an inverse relationship between price and demand. That is, when the price goes up, demand goes down.
However, for Veblen goods, there is a direct relationship between price and demand. When the price goes up, demand for that product goes up too.
This is because Veblen goods are luxury products meant to display exclusivity, wealth, and social status.
If you’re meeting two people, and one of them drives a Ferrari 296 GTB and the other drives a Toyota Camry, most assume the person driving the Ferrari is much wealthier. Individuals like to buy expensive cars not only to show they are wealthy but also because few people can afford them.
The exclusivity of the Ferrari is what drives its demand. And that exclusivity is driven by its high price tag. The high price signals to people that this is a product only for the rich and successful. So if the price of a veblen good suddenly plummets, then demand will drop too because it would lose its exclusive nature.
Examples of Veblen goods are designer clothing (Gucci, Prada, and Armani), real estate (Martha’s Vineyard), and even attendance at universities like Stanford, Yale, and Georgetown. Their exclusivity drives their demand. After all, if anyone could get into these schools, why would rich Hollywood parents be willing to pay millions in bribes to get their kids in?
So, now the big question is how is bitcoin related to Veblen goods? Well, the short answer is that bitcoin is a Veblen good.
During the first years of its inception, when bitcoin’s price was low, demand was also low.
Barely anyone heard of bitcoin then and thought it was worthless, so no one was interested in buying it. But as the price of bitcoin climbed, people began noticing and its demand increased. The more bitcoin’s price increases, the more valuable an asset it becomes in the eyes of the market, and the more people want it.
So that’s bitcoin and Veblen goods, and now you know why bitcoin is a Veblen good.
This is a guest post by Siby Suriyan. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.